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R.M Goculdas v. Commissioner Of Income-Tax, Bombay
Structured Summary of the Opinion (Desai, J.)
Factual and Procedural Background
This reference arises from two questions referred to the High Court by the Income-tax Appellate Tribunal, Bombay, Bench "D", at the instance of the assessee. The assessee (an individual) and his wife, Rukmini, were partners in the firm Messrs Kosangas & Company. For the assessment years 1966-67 and 1967-68 the firm suffered net losses. The Income-tax Officer (ITO) included, under section 64 of the Income-tax Act, the wife's share of the firm's loss in the assessee's assessment — Rs. 28,185 for 1966-67 and Rs. 84,406 for 1967-68 — and computed the total loss in the assessee's hands accordingly.
The Additional Commissioner of Income-tax (Addl. CIT), on reviewing the records and having regard to the decision of the Gujarat High Court in Dayalbhai Madhavji Vadera v. CIT ([1966] 60 ITR 551), formed the opinion that the wife's share of the loss should not have been included in the husband's assessment. Acting under section 263(1), he held the ITO's orders to be erroneous and prejudicial to the Revenue and directed the ITO to exclude the wife's share of loss.
The assessee appealed to the Income-tax Appellate Tribunal (ITAT). Before the Tribunal the assessee contended that the inclusion of the wife's loss was not prejudicial to the Revenue and therefore the Addl. CIT lacked jurisdiction under section 263. The Tribunal rejected that submission (observing the possibility of prejudice in subsequent years through set-off of losses) and upheld the Addl. CIT's exercise of jurisdiction; it also accepted the Gujarat High Court ruling on the substantive point and directed exclusion of the wife's loss. The Tribunal's order led to the present reference of two questions to the High Court.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the loss apportioned to the wife in the firm of M/s. Kosangas & Company was rightly excluded in determining the appellant's total income or total loss?
- Whether, on the facts and in the circumstances of the case, the Additional Commissioner of Income-tax had rightly assumed jurisdiction under section 263 and had rightly passed the order in question?
Arguments of the Parties
Appellant's Arguments (as recorded before the Tribunal)
- The inclusion of the wife's share of loss in the husband's assessment could not be regarded as prejudicial to the Revenue; consequently the Additional Commissioner could not assume jurisdiction under section 263 to revise the ITO's orders.
- Counsel (in earlier proceedings before other courts) relied on authorities and precedent (for example, Harakchand Makanji & Co. v. CIT) to support the contention that the term "income" might carry the concept of profits and losses; that line of argument was presented to earlier benches and courts.
Revenue / Respondent's Arguments (as reflected in the orders)
- The Addl. CIT formed the view (relying on the Gujarat High Court decision in Dayalbhai Madhavji Vadera v. CIT) that the wife's share of loss ought not to have been included in the husband's assessment; therefore the ITO's orders were erroneous and prejudicial to the Revenue and were amenable to revision under section 263.
- The Tribunal and the Addl. CIT relied on the Gujarat High Court ruling as the decisive precedent on the specific point and preferred it to commentary (Kanga & Palkhivala).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Dayalbhai Madhavji Vadera v. CIT, [1966] 60 ITR 551 (Guj.) | Held (relying on s.16(3) of the 1922 Act) that the provision provides for inclusion of income of spouse but does not create a legal fiction deeming another's income to be the assessee's; "includes" was read as addition (not subtraction) and inclusion of negative income under that sub-section was not warranted. | The Addl. CIT and the Tribunal relied on this decision to conclude that the wife's loss should be excluded from the husband's assessment; the High Court in the present opinion criticises this decision as narrow and over-technical and rejects its approach. |
| Dr. T.P. Kapadia v. CIT, [1973] 87 ITR 511 (Mys.) | The Mysore High Court disagreed with Dayalbhai and relied on a 1944 C.B.R. circular; it held the circular binding on officers and that the spouse's loss should be treated as the assessee's loss for clubbing purposes. | The present Court treats this decision as correctly taking the broader view; it is relied upon to support the conclusion that a spouse's loss is includible for clubbing and that Dayalbhai was incorrect. |
| Harakchand Makanji & Co. v. CIT, [1952] 22 ITR 33 (Bombay) | Held (re s.42(3) of the 1922 Act) that "profits and gains" means the total result of the business and if there were losses they too would be apportioned like profits — used to argue that "income" may include negative income. | Before the Gujarat Division Bench this case was cited by counsel for the assessee; the Gujarat High Court rejected the argument based on this authority. The present Court records that the Gujarat Court did not accept this line of reasoning. |
| CIT v. Harprasad & Co. P. Ltd., [1975] 99 ITR 118 (SC) | The Supreme Court observed that the words "income" or "profits and gains" should be understood as including losses also (loss as "negative profit"). | The present Court cites this observation to support the proposition that "income" may include losses and uses it as authority for rejecting the narrow view of Dayalbhai. |
| Navnit Lal C. Javeri v. K.K. Sen, AAC of I.T., [1965] 56 ITR 198 (SC) | Considered on the point of binding force of circulars issued by the Board of Revenue. | The Mysore High Court relied on this Supreme Court decision to hold that the 1944 C.B.R. circular was binding on officers; the present Court records that Mysore referred to Navnit Lal C. Javeri to support the circular's binding force. |
| Tata Iron & Steel Co. Ltd. v. N.C. Upadhyaya, [1974] 96 ITR 1 | Expressed the High Court view on the binding force of circulars of the Board of Revenue. | The present Court notes that its own High Court had expressed the same opinion on the binding force of circulars and cites this decision in that context. |
| J.H. Gotla v. CIT, [1973] 91 ITR 531 (Mys.) | The Mysore High Court followed Dr. T.P. Kapadia and held that the spouse's loss must be treated as the assessee's loss for clubbing. | The present Court records this as a subsequent Mysore decision following Kapadia and treating spouse's loss as includible. |
| CIT v. B.M. Edward, India Sea Foods, [1979] 119 ITR 334 (Kerala) (Full Bench) | Considered the effect of withdrawal (on April 6, 1972) of the 1944 circular and held that the circular remained applicable for assessment years where it was in force on the first day of the assessment year; affirmed that the ITO was bound by the circular for such years. | The present Court cites this Full Bench decision to support the proposition that up to the date of withdrawal of the circular there was no scope for a contrary view and that the circular operated to require inclusion of spouse's loss for those years. |
| CIT v. Smt. Mary Ignatius, [1983] 141 ITR 954 (Kerala) | Reached the same conclusion as Mysore High Court (that spouse's loss is includible) without relying on the 1944 circular. | The present Court cites this as a later decision that supports the view that "income" includes loss for clubbing purposes even without reliance on the circular. |
| CIT v. Badri Prasad Agarwal, [1983] 142 ITR 353 (M.P.) | The Madhya Pradesh High Court held similarly that spouse's loss is includible and observed that the Explanation subsequently added to s.64 is a parliamentary exposition of the meaning of "income" in the unamended section. | The present Court cites this decision to reinforce the conclusion that the broader view (inclusion of losses in "income" for clubbing) is correct and that the later statutory Explanation merely clarifies that position. |
Court's Reasoning and Analysis
The Court divided its analysis along the two questions referred. On Question No. 2 (jurisdiction under s.263) the Court agreed with the Tribunal's approach: the Addl. Commissioner rightly assumed jurisdiction because the inclusion of the wife's share of loss could operate to prejudice the Revenue in subsequent years by reducing the assessable income available for set-off. The Court held that the Tribunal's reasoning on this aspect "is correct and cannot be faulted" and answered Question No. 2 in the affirmative in favour of the Revenue.
Question No. 1 (substantive inclusion/exclusion of the wife's apportioned loss) received detailed attention. The Court examined the Gujarat High Court decision in Dayalbhai (which had held that the relevant provision created an artificial liability to add the spouse's income but did not permit including a spouse's negative income or loss), and explained that Dayalbhai read the word "includes" in a restrictive, additive sense and rejected analogies drawn from other provisions and cases (such as Harakchand Makanji re s.42(3) of the 1922 Act).
The Court considered subsequent authorities that had taken a different approach (primarily the Mysore High Court in Dr. T.P. Kapadia and its follow-ups), noting that Mysore relied on a 1944 C.B.R. circular which the Gujarat Court had not considered. The Mysore view was that the circular was binding on officers under the statutory provisions in force at the material time and that the spouse's loss should be treated as the assessee's loss for clubbing purposes. The Court recorded that its own High Court (and other High Courts later) had expressed agreement with the binding force of such circulars.
The Court also relied on the Supreme Court's statement in CIT v. Harprasad & Co. P. Ltd. ([1975] 99 ITR 118) that the words "income" or "profits and gains" should be understood as including losses (loss being a "negative profit"). Taking into account the Mysore, Kerala and Madhya Pradesh authorities (including Full Bench decisions and later rulings that did not rely on the circular), the Court concluded that the Dayalbhai approach was narrow and over-technical and that the correct legal position is that, for the purpose of clubbing provisions, "income" or "profits" does include negative income, i.e., losses.
The Court observed that Explanation 2 to section 64 (inserted by the Finance Act, 1979, effective April 1, 1980) merely clarified this legal position: it was regarded as clarificatory and reflective of the correct interpretation both under s.16 (1922 Act) and s.64 (1961 Act). The Court therefore concluded that the Tribunal was wrong on Question No. 1 in holding (following Dayalbhai) that the wife's apportioned loss should be excluded.
Holding and Implications
Holding — The Court answered the referred questions as follows:
- Question No. 1: Answered in the negative and in favour of the assessee. The Court held that the loss apportioned to the wife in the firm was includible in determining the assessee's total income or total loss.
- Question No. 2: Answered in the affirmative and in favour of the Revenue. The Additional Commissioner had rightly assumed jurisdiction under section 263 and rightly passed the order in question.
Implications:
- Direct effect on the parties: The substantive position is that the wife's apportioned loss is to be included (i.e., treated as part of the assessee's total income/total loss) for the assessment years in question. At the same time the Addl. CIT was held to have validly exercised revisionary jurisdiction under section 263 to correct the ITO's orders.
- On precedent and statutory interpretation: The Court rejected the narrow reading of the Gujarat High Court in Dayalbhai and endorsed the broader view (adopted by Mysore, Kerala, Madhya Pradesh and in Supreme Court dicta) that "income" includes losses for the purpose of clubbing. The Court observed that the later statutory Explanation (to s.64) is clarificatory of this correct legal position.
- No new wide precedent beyond this interpretation was asserted by the Court; the decision resolves the reference by preferring the broader line of authorities and treating the statutory Explanation as declaratory of the proper meaning.
- Costs: The Commissioner is ordered to pay the costs of the reference to the assessee.
Note: This summary is structured strictly from the content of the provided opinion. No information has been added beyond what appears in the opinion text.
Desai, J.:— In this reference two questions referred to us at the instance of the assessee by the Income-tax Appellate Tribunal, Bombay, Bench “D”, are as under:
“(1) Whether, on the facts and in the circumstances of the case, the loss apportioned to the wife in the firm of M/s. Kosangas & Company was rightly excluded in determining the appellant's total income or total loss?
(2) Whether, on the facts and in the circumstances of the case, the Additional Commissioner of Income-tax had rightly assumed jurisdiction under section 263 and had rightly passed the order in question?”
2. A few facts necessary to appreciate the point in controversy may now be stated. The assessee, an individual, was a partner in the firm of Messrs Kosangas & Company in which his wife, Rukmini, was also a partner. We are concerned in this matter for assessment years 1966-67 and 1967-68. For these two years the said firm had suffered a net loss in its business. When the ITO finalised the assessment for the two years, he included in the assessee's hands, under the provisions of s. 64 of the I.T Act, the share of loss falling to the wife which came to Rs. 28,185 for the assessment year 1966-67 and Rs. 84,406 for the assessment year 1967-68. The total loss in the assessee's hands including these two amounts was computed at Rs. 2,06,856 and Rs. 6,48,590 respectively for the two assessment years. The Addl. CIT on going through the records formed the opinion that the wife's share of loss in the firm for the two years should not have been included in the assessment of the husband. This opinion was formed obviously in view of the decision of the Gujarat High Court in Dayalbhai Madhavji Vadera v. CIT, [1966] 60 ITR 551. Accordingly holding that the orders of the ITO were erroneous and prejudicial to the interest of the Revenue, the Addl. Commissioner acting under the provisions of s. 263(1) revised these orders directing the ITO to exclude the loss sufferred by the wife for the two years under consideration.
3. Aggrieved by this order of the Addl. Commissioner, the assessee appealed to the Income-tax Appellate Tribunal. Before the Tribunal it was urged in the first place that the inclusion of the loss in the assessment of the husband could not be regarded as prejudicial to the Revenue and consequently the Addl. Commissioner could not assume jurisdiction to pass orders under s. 263. The Tribunal negatived this argument, observing that the assessee owned considerable assets and the huge loss incurred during the two years would have to be set off against the likely incomes of future years. In the opinion of the Tribunal by reducing the quantum of loss determined for the two years under appeal there was likelihood of gain to the Revenue in subsequent years. In other words, determination of excessive loss in any particular year or years could be a matter likely to cause prejudice to the Revenue, although the prejudice will occur in subsequent years. It, therefore, negatived the submission of the assessee and held that the Addl. Commissioner had exercised the jurisdiction rightly.
4. The next point considered by the Tribunal was whether the Addl. Commissioner was correct in directing the ITO to delete the wife's (share of) losses. The Tribunal observed in its order dated 18th January, 1983, that this was the only High Court ruling directly on the point and this ruling of the Gujarat High Court was against the assessee. The observation in the Commentary to the Income Tax Act by Kanga and Palkhivala at page 599 of the 7th Edition Vol. 1, was brought to the attention of the Tribunal but the Tribunal preferred to accept, and rightly so, the decision of the High Court in preference to the opinion of the esteemed commentators.
5. It may be pointed out that in the statement of case, the Tribunal has referred to a later decision of the Karnataka High Court which has chosen to differ from the Gujarat High Court. This decision is Dr. T.P Kapadia v. CIT, [1973] 87 ITR 511 (Mys.).
6. The question No. 2 referred to us is based on the first argument considered by the Tribunal. In our opinion, the approach of the Tribunal on this aspect is correct and cannot be faulted. If that be so, the said question would be required to be answered in favour of the Revenue.
7. It is question No. 1 on which we have been called upon to lavish attention. Apart from the two authorities referred to in the statement of case, certain other authorities are cited at the bar. These later authorities have preferred the Kai-nataka view and have expressly dissented from the decision of the Gujarat High Court in Dayalbhai's case, [1966] 60 ITR 551. We may now briefly review the authorities cited at the bar.
8. The decision on which reliance was placed by the Tribunal, which decision, as already pointed out, has been adversely commented upon by Kanga and Palkhivala is that of the Gujarat High Court in Dayalbhai's case. In the aforesaid decision, whilst dealing with s. 16(3) of the Indian I.T Act, 1922, it was observed that the said provision only provided for inclusion in the total income of the individual the income of his spouse or minor child and did not create a legal fiction whereby the income of another is deemed to be the income of the individual. The Division Bench has accepted that income may in certain cases include a negative income, viz., loss but according to the Gujarat High Court that concept prevailed only in the case of computation of the actual income of the assessee and including a negative income was not warranted, according to the Bench, so far as sub-s. (3) of s. 16 was concerned. The Bench further observed that the expression “includes” in cl. (a) of sub-s. (3) of s. 16 prima facie denoted the concept of adding rather than substracting, deducting or setting off. It may be pointed out that before the Division Bench of the Gujarat High Court, counsel for the assessee had referred to a decision of the Bombay High Court, viz., Harakchand Makanji & Co. v. CIT, [1952] 22 ITR 33, where the Division Bench has held that the expression “Profits and gains “as used in s. 42(3) of the Indian I.T Act, 1922, means not only profits made by the business, but also the total result of the particular business, so that if in place of profits and gains there were losses, they were as much to be apportioned as the profits of the business. This observation was sought to be used in support of the contention that the term “income” used in s. 16(3) carried with it the concept of profits and gains, and, therefore, would include negative income, that is, loss (also). In the opinion of the Division Bench of the Gujarat High Court, the said argument was not well founded. According to the Gujarat High Court, s. 16(3) creates an artificial liability and provides for the inclusion or addition of income of a person other than the assessee. The Division Bench, accordingly, negatived the arguments advanced before it on behalf of the assessee and held in favour of the Revenue.
9. Our attention was drawn to a decision of the Supreme Court in CIT v. Harprasad & Co. P. Ltd., [1975] 99 ITR 118, wherein at p. 124, it has been observed as under:
“From the charging provisions of the Act, it is discernible that the words ‘income’ or ‘profits and gains’ should be understood as including losses also, so that, in one sense, ‘profits and gains’ represent ‘plus income’ whereas losses represent ‘minus income’. In other words, loss is negative profit.”
10. Even without referring to the other authorities cited at the bar we would like to observe, with respect to the learned judges of the Gujarat High Court, that the view taken and approach discernible in Dayalbhai's case, [1966] 60 ITR 551 (Guj), appears to be narrow, over-technical and, hence, incorrect. We are fortified in our reaction by subsequent decisions of the several High Courts to which we may now briefly advert.
11. The decision of the Gujarat High Court came to be considered by the Mysore High Court (as it then was) in Dr. T.P Kapadia v. CIT, [1973] 87 ITR 511. The attention of the Division Bench of the Mysore High Court was drawn to C.B.R Circular No. 20 of 1944, dated July 15, 1944, and which is set out at pages 514 and 515 of the Mysore High Court's decision. The Mysore High Court observed that the aforesaid circular was not brought to the notice of the Gujarat High Court in Dayalbhai's case, [1966] 60 ITR 551, and the view taken by the Gujarat High Court was contrary to the instructions given by the Central Board of Revenue. The Mysore High Court then goes on to observe that under s. 5(8) of the 1922 Act and s. 119 of the 1961 Act, a circular of the above kind would be binding on all officers and persons employed in the execution of the 1922 act and the 1961 act. In this connection, the Mysore High Court refers to the decision of the Supreme Court in Navnit Lal C. Javeri v. K.K Sen, AAC of I.T, [1965] 56 ITR 198. We may add that our High Court has expressed the same opinion on the binding force of circulars. This was in Tata Iron & Steel Co. Ltd. v. N.C Upadhyaya, [1974] 96 ITR 1. Accordingly, the Mysore High Court reversed the decision of the Tribunal which had followed the Gujarat High Court's decision in Dayalbhai's case and answered the question referred to it in favour of the assessee.
12. The point came to be considered once again by the Mysore High Court in J.H Gotla v. CIT, [1973] 91 ITR 531. The Mysore High Court followed its earlier decision in Dr. T.P Kapadia's case, [1973] 87 ITR 511, and once again held that the loss incurred by a spouse was required to be treated as if it were a loss sustained by the assessee.
13. The Full Bench of the Kerala High Court applied its mind to the question in CIT v. B.M Edward, India Sea Foods, [1979] 119 ITR 334 [FB]. The Kerala High Court was considering the case of an assessee for the assessment year 1971-72, and noted that the 1944 circular of the Board of Revenue, on which reliance had been placed by the Mysore High Court in Dr. T.P Kapadia's case, [1973] 87 ITR 511, had been withdrawn on April 6, 1972, that is, after the expiry of the assessment year 1971-72. According to the Kerala High Court, the fact that the assessment of the assessee for that assessment year was completed after the withdrawal of the circular would make no difference and the circular was still applicable. It confirmed the decision of the Tribunal holding that it was right in law in concluding that the instructions contained in the said circular which were in force on the first day of the assessment year would be applicable and the ITO was bound by it, even though the actual order was passed subsequent to the withdrawal of the circular.
14. In our opinion, there is no scope for any contrary view up to April 6, 1972, which was the date of the withdrawal of the said circular. It would have been possible to dispose of the reference made to us only on the aforesaid limited footing but we have been invited to express our view on the position between the said date and the amendment of s. 64, by which amendment Explanation 2 was added after sub-s. 2 of the said section. By this Explanation, it now appears to have been clarified that for the purpose of this section, income would include loss. This Explanation 2 came to be inserted by the Finance Act, 1979, with effect from April 1, 1980.
15. It would, however, appear to us that this Explanation must be regarded as being clarificatory in nature as reflecting the correct legal position both under s. 16 of the Indian I.T Act, 1922, as also under s. 64 of the I.T Act, 1961, and the proper approach in the specific provisions for aggregation or clubbing. If the narrow view which commented itself to the Gujarat High Court was to be taken, a clearly anomalous position would arise. We may point out that in the later decisions in CIT v. Smt. Mary Ignatius, [1983] 141 ITR 954, the Kerala High Court, and in CIT v. Badri Prasad Agarwal, [1983] 142 ITR 353, the Madhya Pradesh High Court, have come to the identical conclusion as the Mysore High Court in Dr. T.P Kapadia's case, [1973] 87 ITR 511 (Mys), without placing reliance on the said circular. The Madhya Pradesh High Court has specifically observed in the latter decision that the Explanation added in s. 64 must be regarded as parliamentary exposition of the meaning of the word “income” as used in the unamended section. In our opinion, even without the said Explanation 2, the correct view is the one taken by the Mysore, Kerala and the Madhya Pradesh High Courts and for the purpose of clubbing, income or profits would include negative income or negative profits, that is, loss also. If that be so, it would have to be held that on question No. 1, the view taken by the Tribunal was erroneous. We, accordingly, answer the questions referred to us as under:
Question No. 1: In the negative and in favour of the assessee. In our view the loss apportioned to the wife in the firm was includible in determining the assessee's total income or total loss.
Question No. 2: In the affirmative and in favour of the Revenue.
16. The Commissioner to pay the costs of the reference to the assessee.
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