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TMI Blog1973 (12) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... these firms were being assessed at Bombay. The previous year for the two firms relevant for the assessment year 1964-65 was the Samvat Year 2019 (October 29, 1962, to October 17, 1963). In both these firms the assessee's wife, Lilavati, was also a partner while two minor sons of the assessee, Kirankumar and Sanjaykumar, were admitted to the benefits of the partnership. The assessee died on July 1, 1963, that is, more than three months before the end of the relevant previous year which ended on October 17, 1963. Both these partnership firms were constituted under instruments of partnership both dated November 26, 1959. The partners included the assessee and his wife, whereas the three minor sons of the assessee, namely, Vinodkumar, Kirankumar and Sanjaykumar, were admitted to the benefits of the partnership. The business of the partnerships was to be closed at the end of every Hindu year, that is, Aso Vad 30, and the profit was to be allocated on Aso Vad 30 as per the profit-sharing ratio mentioned therein. It appears that Vinodkumar, the eldest son of the deceased, became a major in 1962, and on January 22, 1962, two supplemental deeds of partnership were executed to recognise the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrued to the wife and the minor children till this date were to be included in the income of the assessee. The Tribunal held that the profits till July 1, 1963, were to be included in the assessment of the deceased under section 64 of the Income-tax Act, 1961. Thereafter, at the instance of the assessee, the question hereinabove set out has been referred to us for our opinion. In order to appreciate the contention urged at the Bar and also in order to understand the several authorities which have been relied upon in the course of the arguments before us, it is necessary to refer to the provisions of the Indian Income-tax Act, 1922. Prior to 1937, there was no provision similar to section 64 of the Income-tax Act, 1961. By the Indian Income-tax (Amendment) Act, 1937 (Act 4 of 1937), section 16(3) was inserted in the Act of 1922 and under that section, in computing the total income of any individual for the purpose of assessment, there shall be included,-- (a) so much of the income of a wife or minor child of such individual as arises directly or indirectly,-- (i) from the membership of the wife in a firm of which her husband is a partner ; (ii) from the admission of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to in that clause) is greater ; and, for the purpose of clause (ii), where both the partners are members of the firm in which the minor child is a partner, the income of the minor child from the partnership shall be included in the income of that parent whose total income (excluding the income referred to in that clause) is greater ; and where any such income is once included in the total income of either spouse or parent, any such income arising in any succeeding year shall not be included in the total income of the other spouse or parent unless the Income-tax Officer is satisfied, after giving that spouse or parent an opportunity of being heard, that it is necessary so to do. These are the departures in the scheme of the Act of 1961 from the scheme of the Act of 1922 so far as they are necessary to be noted for the purposes of this judgment. The question as to when the income can be said to arise is required to be considered while applying section 64(1) because in all such cases the income must arise directly or indirectly to one or the other of the individuals referred to in the five different clauses of section 64(1). The question was finally settled by the decision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a father carried on a business in partnership with his sons some of whom were minors and were only admitted to the benefits of the partnership. One of the minors attained majority on the 20th August, 1950, and, as he elected to continue as a partner, a fresh partnership deed was executed on August 20, 1950. Under both partnership deeds accounts were to be taken and the profit or loss ascertained on the Divali day of each year. The minor son who attained majority died on August 31, 1950. The share of the deceased son in the profits as ascertained on August 31, 1950, was Rs. 2,64,450. The proportionate profits on this basis up to August 20, 1950, when the son attained majority, was Rs. 2,49,459, and the income-tax authorities included this amount in the assessment of the father under section 16(3) of the Act of 1922 on the ground that this amount was income of a minor child of the assessee which arose from the admission of that minor to the benefits of the partnership. On these facts it was held by the Bombay High Court that, as the minor son had elected to remain a partner after attaining majority and the partnership continued, and under the terms of the partnership, profit or loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omas v. Commissioner of Income-tax. The facts have to be stated in order to appreciate the two points which were decided by the Supreme Court in that case. T, the assessee, who held 750 " A " shares in a company, was engaged to be married to Mrs. J. K., a divorcee, and the engagement was announced on September 3, 1947. An application to transfer the shares was presented to the company on December 10, 1947, by the assessee and Mrs. J. K. The transfer deed ran as follows: " I, T.........in consideration of my forthcoming marriage with J. K. (hereinafter called 'the said transferee') do hereby transfer the 750 'A' shares......standing in my name in the books of the company.........to hold to the said transferee...subject to the several conditions on which I held the same at the time of the execution thereof...... " The company transferred the shares to Mrs. J. K. and registered her as the owner of the shares on December 15, 1947. The marriage was solemnised on December 18, 1947, and the fact of marriage was communicated to the company on January 26, 1948, and the name of the shareholder was changed in the books of the company to Mrs. J. T. The question was whether the income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the total income of any individual, there shall be included all such income as arises directly or indirectly to the spouse of such individual from the membership, etc. " Therefore, the interpretation which was placed by the Supreme Court on section 16(3)(a) of the Act of 1922 is very much material for the purpose of interpreting section 64(1)(i) of the Act of 1961 and following that decision in Philip John Plasket Thomas's case it must be held that even for the purpose of section 64(1), clause (i), at the time when the income accrues to the spouse it must be the income of the spouse of that individual whose total income has to be computed for the purpose of assessment. The relationship of husband and wife must subsist at the time of the accrual of the income ; otherwise, the income will not be the income of the wife, for the word " spouse " predicates a marital relationship. We have already pointed out the change in the language of section 64 of the Act of 1961 and the widening of the provisions as compared to the provisions of section 16(3) of the Act of 1922 but that was only for the purpose of roping in the husband's income and including it in that of the wife in an appropr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no such contract to the contrary, the two partnership firms under consideration were dissolved by operation of law on the death of Ratilal Ranchhoddas, the deceased-assessee. It was his death which gave rise to the contingency on which the accounts became liable to be made up and it was his death which brought about the dissolution of the firms and hence it was his death which required the accounts to be made up and the profit as on July 1, 1963, was ascertained. Though the accounts were made up at the end of Divali, in fact the accounts up to the period July 1, 1963, were ascertained and allocated to the different persons entitled to profits in the two partnership firms. At the time of the death of Ratilal Ranchhoddas which gave rise to the dissolution of the firms, the marital relationship between the deceased and Lilavati also came to an end. From the moment of Ratilal's death, she ceased to be the wife. She became a widow and it is clear that the marital relationship ceased to subsist at the very moment of time when the right to receive the share of profits in the two firms accrued to Lilavati. The very event which gave rise to the dissolution of the two firms and hence to her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 18. I do not agree that the 'wife of the settlor' in the year of assessment is treated as a persona designata, but even if it were so the question would still remain whether the interest of the persona designata, if it only takes effect after her marriage has been dissolved, is obnoxious to the provisions of these sections. " Lord Morton of Henryton in his speech at page 109 pointed out that he did not agree with the observation of Clauson L.J. in Gaunt's case. He observed : " I think that the treatment of husband and wife by the legislature for income-tax purposes rests on the view that any income enjoyed by one spouse is a benefit to the other spouse. It is not surprising, therefore, that in the sections now under consideration a benefit to the wife of the settlor is treated as being a benefit to the settlor, but it seems to me unlikely that this principle is being extended by these sections to the widow of the settlor. " Therefore, the House of Lords declined to accept the interpretation placed by the Court of Appeal in Gaunt's case to the effect that the word " wife " occurring in the relevant provisions of Finance Act included a widow as well. Regarding both thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed-assessee before us, the right of Lilavati to receive the profits which accrued to her because of the death, cannot be said to accrue to her in her capacity as the wife of the deceased-assessee. The particular event which gave rise to the dissolution of the firms and hence to a right in Lilavati to receive her share of the profits as of July 1, 1963, also snapped the marital relationship and as a result she ceased to be the wife of the deceased-assessee. Under these circumstances, it must be held, to use the language of the Supreme Court in Philip John Plasket Thomas's case, that the marital relationship between Lilavati and her deceased husband no longer subsisted at the time when her right to receive the share of the profits accrued to her or arose to her. She ceased to be the wife of the deceased by the very event which gave rise to a right in her to receive her share of profits from the two partnership-firms. Following the interpretation placed by the Supreme Court in Philip John Plasket Thomas's case on section 16(3)(a), equivalent to section 64(1)(i), it must be held in the instant case that, so far as the share of profits coming to Lilavati was concerned, that amount was n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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