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T.P Kapadia v. Commissioner Of Income Tax .

Karnataka High Court

Jan 13, 1972

Judgment

Subsequent
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Structured Summary of the Opinion by Govinda Bhat, J.

Factual and Procedural Background

These references arise from three references made by the assessee, Dr. T. P. Kapadia, under S. 256(1) of the Income Tax Act, 1961. They concern assessment years 1961-1962, 1962-1963 and 1963-1964. The 1961-1962 assessment was made under the Indian Income-tax Act, 1922; the other two assessments were made under the Income-tax Act, 1961.

Mrs. Kapadia (the assessee's wife) was a partner in three firms in which the assessee was also a partner during the relevant years. The Income Tax Officer included the profits or losses arising to Mrs. Kapadia in the assessee's assessment by invoking S.16(3) of the 1922 Act for 1961-62 and S.64 of the 1961 Act for 1962-63 and 1963-64. Subsequently, after completing the original assessments, the Income Tax Officer became aware of the Gujarat High Court decision in Dayalbhai Madhavji Vadera v. Commissioner of Income-tax (60 ITR 551) and, believing that decision indicated that a spouse's share of a loss could not be included in the individual's total income, reopened the assessments under Section 147(b) of the 1961 Act and redetermined the assessee's income by withdrawing the benefit of the loss that had been taken into account.

The assessee's appeals to the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal (Bangalore Bench) were dismissed; the Tribunal followed the Gujarat High Court decision in Dayalbhai's case. The High Court received references raising specific questions of law relating to inclusion (or not) of a spouse's share of partnership losses in the assessee's total income for the named assessment years.

Legal Issues Presented

Whether, on the facts and circumstances and on a proper interpretation of S.16(3) of the Indian Income-tax Act, 1922, the share of the losses of the wife of the assessee in registered firms where the assessee is also a partner could be set off against the income of the assessee while computing the total income? (Assessment Year 1961-62)
Whether, on the facts and circumstances, the net income of the wife from the various firms in which her husband is also a partner should first be computed before applying the provisions of S.16(3) of the 1922 Act? (Assessment Year 1961-62)
Whether, on the facts and circumstances and on a proper interpretation of S.64 of the Income-tax Act, 1961, the share of the loss of the wife of the assessee in registered firms where the assessee is also a partner could be set off against the income of the assessee while computing the total income? (Assessment Years 1962-63 and 1963-64)
Whether, on the facts and circumstances, the net income of the wife from the various firms in which her husband is also a partner should first be computed before applying the provisions of S.64 of the 1961 Act? (Assessment Years 1962-63 and 1963-64)

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Dayalbhai Madhavji Vadera v. Commissioner of I.T., Gujarat (60 ITR 551)	Held that where the spouse's or minor child's share in a firm is a loss, such loss cannot be included in the individual's total income (the decision held 'income' does not include a loss for the purposes of the provision).	The Tribunal followed this decision when upholding the assessments. The High Court observed that the Gujarat decision was not brought to the notice of the Central Board of Revenue Circular and noted that Dayalbhai's decision, though binding in Gujarat, is contrary to the Board Circular relied upon by the Court; hence, the Tribunal erred in following Dayalbhai.
Commissioner of I.T., Bombay v. Manilal Dhanji (44 ITR 876)	Used to explain the object of S.16(3) of the 1922 Act — to detect attempts by an individual to avoid or reduce tax incidence by transferring assets or admitting family members to partnership.	The Court cited this authority to state the object of S.16(3) and to place the statutory provision in context when considering the proper interpretation to adopt concerning a spouse's share of partnership losses.
Navnitlal C. Javeri v. Appellate Assistant Commissioner of Income-tax, Bombay (56 ITR 198)	Authority for the proposition that a Circular issued under the relevant statute (S.5(8) of the 1922 Act / S.19 of the 1961 Act) is binding on officers and persons employed in the execution of the Income-tax Acts.	The Court relied on this precedent to support the view that the Central Board of Revenue Circular (CBR. Cir. No. 20 of 1944) was binding on the Income Tax Officer who reopened the assessments and therefore the Tribunal erred in ignoring that Circular.

Court's Reasoning and Analysis

The Court proceeded through the following analytical steps (as recorded in the opinion):

Statutory comparison: The Court noted that S.64 of the 1961 Act corresponds to S.16(3) of the 1922 Act and, for the purposes of the questions referred, the differences between the two enactments were not material.
Purpose of the provision: The Court cited Commissioner of I.T., Bombay v. Manilal Dhanji to explain that the object of S.16(3) is to detect attempts to evade or reduce tax by transferring assets to a spouse or minor child or admitting them into partnership.
Administrative guidance (Board Circular): The Court placed significant weight on Central Board of Revenue Circular No. 20 of 1944 (CBR. Cir. No. 20 of 1944, dt. 15th July 1944), issued under S.5(8) of the 1922 Act. That Circular took the view that, as a matter of equitable administrative practice, a loss incurred by the wife or minor child in a firm should be treated as if it were a loss sustained by the individual (i.e., the loss could be set off against the individual's taxable income and, if not wholly set off, carried forward under S.24).
Binding effect of the Circular on officials: Relying on the Navnitlal C. Javeri decision and the statutory provisions giving effect to Board Circulars, the Court held that such a Circular is binding on officers and persons employed in execution of the Income-tax Acts, even though it is not binding on the assessee personally.
Conflict with Gujarat decision: The Court observed that the Gujarat High Court decision in Dayalbhai did not have the Board Circular before it and reached a contrary conclusion. The Court noted that Dayalbhai's holding was therefore at odds with the instructions in the Circular, and that Dayalbhai's precedent is binding only within the State of Gujarat.
Choice between two views: The Court acknowledged that two views are possible — (a) the view taken in the Gujarat decision that 'income' does not include losses and therefore a spouse's share of a loss cannot be included in the individual's income, and (b) the view reflected in the Board Circular that such losses should be treated as the individual's loss for equitable and practical reasons. The Court accepted the latter as the just and preferable view.
Practical consideration: The Court rehearsed the policy argument (also noted in the Kanga & Palkhivala commentary cited in the opinion) that adopting the Dayalbhai approach would lead to anomalous and unfair results — for example, alternating liability between spouse and individual in profit years versus loss years and the possible loss of carry-forward rights.
Procedural note: The Court recorded that, at a hearing, counsel for the Revenue sought adjournment to ascertain whether the Board Circular had been withdrawn; no evidence was produced to show it had been withdrawn.
Conclusion: For these reasons the Court concluded the Tribunal was in error for following Dayalbhai when a binding Board Circular to the contrary existed and answered the referred questions accordingly in favour of the assessee.

Holding and Implications

Holding: The Court answered the first question in each reference in the affirmative and in favour of the assessee — i.e., the share of the wife's losses in registered firms where the husband is also a partner can be set off against the income of the assessee while computing the total income (in accordance with the Central Board of Revenue Circular No. 20 of 1944). The Court further held that, in view of this answer, the second question in each reference did not arise.

Direct consequences and implications (as stated in the opinion):

The Tribunal erred in following the Gujarat High Court decision in Dayalbhai's case because it did not take the Board Circular into account; the Circular was binding on the Income Tax Officer who reopened the assessments.
The practical effect for the parties is that the assessee's position is upheld with respect to inclusion (or set-off) of the wife's share of partnership losses against the assessee's total income for the referenced assessment years.
The assessee was awarded costs (Advocate's fee of Rs. 250, one set), as recorded in the order.

The opinion resolves the referred legal questions in favour of the assessee and rests its ruling on the binding administrative Circular and relevant authorities; it does not purport to set out a broader rule beyond the application of the Circular and the statutory framework described.

Source: Opinion as provided. This summary is limited strictly to the information contained in the provided opinion and does not add or infer facts or law beyond that text.

Show all summary ...

Govinda Bhat, J.:— These are three references made at the instance of the Assessee under S. 256(1) of the Income Tax Act, 1961, hereinafter called the 1961 Act. They relate to the assessment years 1961-1962, 1962-1963 and 1963-1964. The Assessee is Dr. T.P Kapadia. His assessment for 1961-1962 was made under the Indian Income Tax Act, 1922, hereinafter called the 1922 Act. His assessments for 1962-1963 and 1963-1964 were made under the 1961 Act. The Assessee's wife Mrs. Kapadia was a partner of three firms in which the Assessee was a partner during the three assessment years. When the Income Tax Officer made the assessments, he invoked the provisions of S. 16(3) of the 1922 Act for the assessment year 1961-1962 and S. 64 of the 1961 Act for the assessment years 1962-1963 and 1963-1964 and included the profits or losses arising to Mrs. Kapadia in the assessment of the Assessee. After the completion of the original assessments, the Income Tax Officer became aware of the decision of the Gujarat High Court in Dayal Bhai Madhavi Vadera v. Commr. of I.T, Gujarat . 60 ITR. 551. wherein it was held that ‘where the share of the wife or minor child in a firm in which the assessee is a partner is a loss, such loss cannot be included in the total income of the assessee’. Therefore he reopened the assessments under Section 147(b) of the 1961 Act and redetermined the income of the Assessee withdrawing the benefit of the loss which had been taken into account while computing the total income of the Assessee. The Assessee's appeals to the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal, Bangalore Bench were dismissed. The Tribunal, following the decision in Dayalbhai's case, affirmed the assessment orders of the Income Tax Officer. The following questions of law have been referred to this Court in ITRC. 17 of 1970 and they relate to the assessment year 1961-1962.

(1) Whether on the facts and in the circumstances of the case and on a proper interpretation of S. 16(3) of the Indian Income-tax Act, 1922, the share of the losses of the wife of the assessee in registered firms where the assessee is also a partner could be set off against the income of the assessee while computing the total income?

(2) Whether on the facts and in the circumstances of the case the net income of the wife from the various firms in which her husband is also a partner should first be computed before applying the provisions of S. 16, (3) of the Indian Income-tax Act, 1922.

2. In ITRC. Nos. 18 and 19 of 1970 which relate to the assessment years 1962-1963 and 1963-1964, the following questions have been referred.

(i) Whether on the facts and in the circumstances of the case and on a proper interpretation of S. 64 of the Income-tax Act, 1961, the share of the loss of the wife of the assessee in registered firms where the assessee is also a partner could be set off against the income of the assessee while computing the total income?

(ii) Whether on the facts and in the circumstances of the case the net income of the wife from the various firms in which her husband is also a partner should first be computed before applying the provisions of S. 64 of the Income-tax Act, 1961?

3. S. 64 of the 1961 Act corresponds to S. 16(3) of the 1922 Act though they are not identical in terms and the later Act has made some changes. So far as the questions referred for our decision are concerned, the difference made in the two enactments is of no consequence. S. 16(3) of the 1922 Act reads:

“16(3). 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 the minor to the benefits of partnership in a firm of which such individual is a partner;

………” (iii) and (iv) omitted as unnnecessary).

4. Section 64 of the 1961 Act reads:

“64. 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;

(ii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm in which such individual is partner;

…………” ((iii), (iv) and (v) omitted as unnecessary).

5. Te object of Sec. 16(3) of the 1922 Act was to find an individual's attempt to avoid or reduce incidence of income-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. Vide Commr. of I.T, Bombay v. Manilal Dhanji . 44 ITR. 876, 881 S.C.

6. In exercise of the power conferred under S. 5(8) of the 1922 Act, the Central Board of Revenue issued CBR, Circular No. 20 of 1944. C. No. 4(13)-IT. 144, dt. 15th July 1944, regarding the interpretation of S. 16(3), (a) of the 1922 Act. The Board therein has taken the view that “it is a more equitable view to take that loss incurred by the wife or the minor child should be treated as if it were a loss sustained by the individual.” The said Circular is found at page 225 of Volume II of the Income-Tax Circulars published by the Central Board of Revenue, Government of India in 1960. It reads:

“CBR. Cir. No. 20 of 1944. C. No. 4(13)-IT./44, dt. 15th July, 1944. Subject:—S. 16(3)(a)—Loss incurred by wife or minor child— Righ of set-off—S. 24(1) and (2).

Attention is invited to the Board's Circular No. 35 of 1941, on the above subject. It was laid down therein that where the wife or minor child of an individual incurs a loss which if it were income would be ineludible in the income of that individual under S. 16(3) such loss should be set off only against the income, if any, of the wife or minor child and if not wholly set off should be carried forward subject to the provisions of S. 24(2). The Board has reconsidered the question and has decided that although this view may be tenable in law, the other and more equitable view is at least equally tenable that such loss should be treated as if it were a loss sustained by that individual. Thus if the wife or minor child has a personal income of Rs. 5,000 which is not ineludible in the individual's income and sustains a loss of Rs. 10,000 from a source the income of which would be ineludible in the income of the individual, the loss should be set off against the income of the individual under S. 24(1), and if not wholly set off should be carried forward under S. 24(2). The wife or the minor child would, therefore, be assessable on the personal income of Rs. 5000. If in any case the wife or minor child claims a set off of the loss against the personal income, it should be brought to the notice of the Board. Board's Circular No. 35 of 1941 is hereby cancelled.”

7. The above Circular was not brought to the notice of the Gujarat High Court in Dayalbhai's case and the view taken is contrary to the instructions given by the then Central Board of Revenue. Under S. 5(8) of the 1922 Act and S. 19 of the 1961 Act, a Circular of the above kind would be binding on all officers and persons employed in execution of the 1922 Act and 1961 Act. Vide Navnitlal C. Javeri v. Appellate Asst. Commr. of Income-tax, Bombay . 56 ITR. 198, 203 S.C.

8. Though the Circular is not binding on the Assessee, it was binding on the Income Tax Officer who reopened the assessments. The decision of the Gujarat High Court would have binding force in the State of Gujarat but not outside that State. In the commentary in the Law and Practice of Income Tax by Kanga and Phalkivala, Volume I, Sixth Edition at p. 526, the learned ahthors have observed that the decision in Dayalbhai's case does not lay down the correct law. This is what has been stated:

“In Dayalbhai Madhavji Vadera v. Commr. of IT. the Gujarat High Court held that in this section ‘income’ does not include a loss and therefore the share of loss apportioned to a spouse or minor child in a partnership cannot be included in the individual's total income. It is submitted that the decision is incorrect. On general principles, income from membership in the firm would include a loss, and the context of clauses (i) and (ii) does not warrant the contrary construction. The liability to assessment cannot alternate from year to year between the individual and spouse, depending on whether there is a profit or a loss. Besides, in the absence of other income, the right to carry forward the loss in a running business would be completely lost if the individual is to be vicariously liable when there is a profit and the loss is to remain a dead loss in the assessment of the spouse or minor child.”

9. In our opinion two views are possible on the question as stated in the Circular of the Central Board of Revenue and the more equitable view which is possible to take is that the loss incurred by the spouse should be treated as if it were a loss sustained by the individual. When two views are possible, the one which is just should be accepted. The Tribunal has also not noticed the Circular. In our judgment, the Tribunal was in error in following the decision in Dayalbhai's case when there is a specific Circular of the Central Board of Refenue on the subject to the contrary which is binding on the Income Tax Officer. It is relevant to state that the above references were heard by us on 1-12-1971 and at the request of Sri S.R Rajasekhara Murthy, the learned Counsel for the Revenue, we granted an adjournment to obtain information from New Delhi as to whether the above Circular has been withdrawn by any other Circular after the decision in Dayalbhai's case. Uptil now, the learned Counsel has not been able to state that the above Circular is not in force.

10. Our answer to the first question in each of the above references is in the affirmative and in favour of the assessee. In view of our answer to the first question, the second question does not arise.

11. The assessee is entitled to his costs. Advocate's fee Rs. 250 one set.