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TMI Blog1981 (1) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... ereafter follow the clauses of the partnership deed which determine the relationship of the parties interest. In our opinion, for purposes of determination of the issue before us, reference to first three clauses would suffice and we would like to incorporate these clauses into this order which are as under: "1. That the partnership business shall be that of practising as Medical Practitioners. 2. That the partnership business shall be carried on under the name style of M/s. Gills Clinic, Moga. 3. That the partnership business hereby constituted shall be deemed to have commended w.e.f. 1st April, 1973 and shall continue till determined as hereinafter provided." 3. In the first assessment of the above constituted firm for the asst. yr. 1974-75 the issue of registration had to be considered by the ITO. The ITO has recorded in his order made under s. 185(1)(a) of the Act, appearing at page 11 of the assessee's paper book that, "the firm appears to be genuine." He allowed registration to this firm. In the body of the assessment order made under s. 143 (3) determining the quantum of income for this year, the ITO has clearly mentioned that, "the assessee firm derives income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsing home for and from the asst. yr. 1974-75 onwards. The ITO also opined that, "the income arising to them was not clubbed in one hand under s. 64(1)(i) of the IT Act, 1961, but was taxed in their hands separately." According to him, under s. 64, share income of Dr. K. S. Gill was required to be clubbed in the income of his wife Dr. Mrs. K. S. Gill because, "the gross total income of his wife from all sources was greater." In this annexure there is also a reference to the Madras High Court judgment in the case of P. Vadamalayan vs. CIT (1969) 74 ITR 94 (Mad) and the Supreme Court judgement in the case of Hospital Mazdoor Sabha (AIR 1960 SC 610). During the course of hearing before us, we informed ourselves of the fact that the record of partnership which had not been sent by the ITO to the Commr. alongwith this letter was required by the Commr. and on requisition dt. 14th Aug., 1978, such record was received in his office on 16th Aug., 1978. 5. On 24th Oct., 1978, the CIT, Jullundur, issued a notice under s. 263 to Dr. Mrs. D.K. Gill in the following terms: "No. Judl/RO/78-79/15 Dt: 24-10-1978 To Dr. Mrs. D.K. Gill C/o. M/s. Gills Clinic, Partap Road, Moga. Subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceeding under s. 263 of the IT Act, 1961 Asst. yrs. 1976-77 and 1977-78 in case of Dr. Mrs. D.K. Gill C/o M/s. Gills Clinic, Partap Road, Moga. Dear Sri, Kindly refer to your notice No. Judl/RO/78-79/15 dt. 24th Oct., 1978. In this connection, it is respectfully submitted as under: 1. It is submitted that the assessments already framed by the ld. ITO are quite in accordance with the provisions of law and the orders are not at all erroneous because these are not prejudicial to the interest of revenue. "2. Your kind attention is invited to the fact that under the provisions of s. 64(1)(i) of the IT Act, 1961, the income of any individual can be included in the income of the spouse of such individuals from the membership of the spouse in a firm carrying on a business in which such individual is a partner. It is submitted that myself and my husband Dr. Gill are both qualified M.B.B.S. Doctors and we are carrying on professions in partnership. It is further submitted that profession and business are two different terms. Under the above mentioned provisions income can be clubbed only where the firm is carrying on a business. Since we are exclusively exercising profession, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at page 597 of the Law and Practice of Income-tax by Kanga and Palkhivala. Seventh Edition, Volume 1, which reads as under: 'Unlike s. 16(3) of the 1922 Act, cl. (1) does not apply to cases where the husband and wife are partners in a firm which exercises a profession. In such a case the husband and the wife are each assessable separately in respect of his or her share of the firm's profits.' 8. Similarly support is taken from para 2 of page 1033 of Income-tax Law by Chaturvedi and Pithisaria's Second Edition Volume 2, which reads as under: 'The words used in s. 16(3) (1)(i) of the 1922 Act were "In a firm of which her husband is a partner". The words used in s. 64 (1) of the 1961 Act were "in a firm carrying on a business in which such individual is a partner". "Business" is defined in s. 2(13) and "profession" in s.2(36) of the 1961 Act and the two are distinct and different activities. Thus, under the 1922 Act, the income of husband and wife could be tagged and taxed in the hands of the husband if the two were partners in a firm carrying on even a profession or vocation. Under the 1961 Act, it is not so. It is only a firm carrying on a business to which the infirmity of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee is really commercial or atleast a mixture of both commerce and vocation". In the end the CIT was satisfied that the provisions of s. 64(1)(i) were applicable in the case before him. He, therefore, set aside the assessment orders for the asst. yrs. 1976-77 and 1977-78 to be made departmental representative novo on consideration of provisions of s. 64(1)(i). He also directed the ITO to adjudicate upon the assessee's claim that a part of the income of the firm which arose from exercise of a profession should not atleast be taxed in her hands under s. 64(1)(i). This order of the Commissioner is now under challenge before us. 9. The ld. Counsel for the assessee submitted before us that the order made by the CIT is illegal and ab initio void because the order nowhere records that the CIT was on appreciation of evidence before him satisfied that the orders made by the ITO in the case of the assessee were erroneous so as to be prejudicial to the interest of the Revenue for both the asst. yr.s under appeal. In this regard, he submitted that the CIT has not recorded as to what was the error and how that error caused prejudice to the Revenue. He contended that mere recordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g on anything else than a profession in partnership and as such the provisions of s. 64(1)(i) were not at all applicable. 12. Having so argued on the legality of the order of the CIT under s. 263, the ld. Counsel for the assessee proceeded to make his submissions on merit. He contended that there is no case on merits because if the background, under which the partnership was formed, is taken into consideration, it would become clear that partnership was constituted to render better assistance to their clientele and in furtherance of profession. He submitted in this regard that it has been admitted by the authorities below that Dr. K.S. Gill was carrying on medical profession individually prior to 1973-74 and his wife, who is also a qualified doctor, joined him and they formed a partnership. They worked under an oral agreement w.e.f 1st April, 1973 and thereafter their partnership was evidenced by an instrument dt. 19th Jan., 1974 appearing at pages 22 to 24 of the assessee 's paper book. It was contended by him that at Moga there was no established Government hospital, not to talk of any nursing home, Therefore, in order to meet emergency cases and to provide necessary medical re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n requiring purely intellectual skill of manual skill controlled by the intellectual skill by the operator as distinguished from an occupation or business which is substantially the production or sale or arrangement for the production or sale of commodities" is involved. 15. It was submitted by him that in order to determine whether the activity carried on was a business activity or professional activity, one has to see whether the profits were dependent upon the personal qualifications and skill of the persons by whom it was carried on. In this respect he relied on the judgement of the King's Bench Division in the case of William Esplen, Son and Swainston, Limited vs. Commissioners of Inland Revenue (1919) 2 K.B. 731. He also submitted that profession involves the idea of occupation requiring either purely intellectual skill, or, if any manual skill, as in painting and sculpture, or surgery, or skill controlled by the intellectual skill of the operator, as distinguished from an occupation which is substantially the production or sale or arrangement for the production or sale of commodities. 16. On the above submission, it was argued by him that the action by the CIT was withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome to the relevant portion of the provisions of s. 64 as substituted by s. 13 of Taxation Laws (Amendment) Act, 1975 w.e.f. 1st April, 1976 which are as under: "64. Income of individual to include income of spouse, minor child etc. (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly- (i) to the spouse of such individual from the membership of the spouse in a firm carrying on a business in which such individual is a partner." There is an Expln. I to s. 64 which is in the following terms: "Explanation I: For the purposes of cl.(i). The individual, in computing whose total income the income referred to in that clause is to be included, shall be the husband or wife whose total income (excluding the income referred to in that clause) is greater; and for the purpose of clause (iii), 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... together. Therefore, if the firms carrying on a profession and it was constituted by Dr. Gill and Dr. Mrs. Gill, how could such a finding given by the ITO in the case of the firm be controverted or reversed in the case of a partner by the CIT under s. 263 of the Act. This position has not been clarified or explained by the CIT in his impugned order and we find that his order deserves to be cancelled on this account alone. 21. The ld. Counsel for the assessee had pointed out to the definition in the Partnership Act of the word 'business'. There is a clear mention that 'business' includes 'profession' and when in the partnership deed dt. 19th Jan., 1974 the doctor partners mentioned the word 'business', it was not that they were intending to embark upon a business. They were already carrying on a profession that they intended to carry on in partnership further. This becomes clear from the facts of the case that Dr. Gill who was carrying on a medical profession prior to 1973 took his wife who had full qualification as a doctor in furtherance of that profession by evidencing this partnership by instrument dt. 19th Jan., 1974. The authorities cited by the ld. Counsel for the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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