TBI! <XlllISSIONER OF INCOME TAX, BANGALORE v. SllI J.H. GOTLA, YADAGIR!

The Judgment of the Court was delivered by

SABYASACHI MIJKHARJI, J. These .appeals arise out of the c orders of the High Court of Karnataka dated 10th August, 1973 for the assessment year 1959-60, 1960-61 and 1961-62 by certificate granted by the High Court under Section 66A(2) of the Indian Income Tax Act, 1922, hereinafter referred to as the 'Act'.

The assessee is an individual. He was carrying on business in the relevant assessment years in purchase and sale of D ground-nut oil and was also running an oil mill. He was also au abkari contractor. On 1st June, 1957, he had gifted away a part of the oil mill machinery, viz., a solvent extraction plant, to his wife and three minor children. A firm was constituted by the assessee' s wife and another person to the profits of which the three minor sons of th~ assessee were also admitted. The mill permises as well as the remaining machinery ~f the assessee were leased out to this firm which carried on the business of the manufacture and sale of ground-nut 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 the stipulated rates on the purchase of oil cake and sale of decoiled cake made by the firm. The assessee himself continued to carry on business in purchase and sale of ground-nut cake and oil on a small scale. The assessee also continued his business as abkai:'i contractor•

The assessee had incurred huge losses in his individual business J.n the earlier years which were being carried forward from year to year · upto 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 1959-00 were Rs: 14,324. The share income of the assessee's wife and minor children from the firm for the assessment year 1959-60 was Rs. H 24,592. The said income was included in the computation

c.r.T • .,. J.H.GOTLA [SABYASACHI MUKHARJI, J.J 717 A of the total income of the assessee under Section 16(3) of the Act for the assessment year 1959-60. The assessee claimed set off of the loss carried forward from the assessment year 1958-59 against the profits of his own business as also the share income of his wife and minor children. The Income tax Officer rejected the claim for set off in so far as it related to the share income B of his wife and minor children. Similar claims for set off were made in the assessment years 1960-61 and 1961-62 but were rejected.

On the appeals preferred by the assessee, the Appellate Assistant Commissioner allowed the set off claimed on the ground c that the assessee himself is deemed to be carrying on the business from which the share income was derived by his wife and minor children. The revenue appealed to the Income Tax Appellate Tribunal, Hyderabad Bench. The. Tribunal held that although the assessee was not carrying on the business of manufacture and sale of oil during the years under appeal, he was continuing to carry on the business of oil in general; that the firm did carry on the same business as was hitherto carried on by the assessee but there was no connection between the assessee and the business carried on by the firm and they were two different entities and, as such, the assessee could not be said to be carrying on the business out of which the share income of the wife and minor children arose. Accordingly it held that the assessee was not entitled under Section 24 (2) of the Act to claim set off of his losses against the income of his wife and minor children.

The following question of law was referred to the High Court: F ''Whether, on the facts and in the circumstances of the case, an assessee would be entitled to carry forward and set off the losses against the share income of the assessee's wife and minor children in resp~ct of the assessment year 1959-60 under Section 24(2) of the Income Tax Act, 1922?" G The same consequences followed for the assessment years 1960-61 and 1961-62. For all these years, the references under section 66(1) of the Act were made to the High Court.

The High Court after setting out the facts mentioned herein- before referred to Section 24(2)(11) of the Act· as it stood in H ~ the relevant year.

p. 718

A It appears from the section, as the High Court has held, that for an assessee to be entitled to carry forward the loss to the following year and to claim set off, the following conditions had to be fulfilled:

(1) The loss must be in a business; B (2) the business, 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 c 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 forward by the assessee in the year in which the carried forward loss was sought to be set off and this D aspect was found in favour of the assessee by the Tribunal. The only ground on which the Tribunal has 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. E The High Court noted that the Tribunal had based its decision on the Gujarat High Court decision in Dayalbhai Kadhavji Vadera v. Camldssiooer of Income-Tax, Gujarat 60. LT.R. 551, but a different view was taken by the Karnataka High Court in the case of Dr. T.p. Kapadia v. CoaDissicmer of Income-Tax, Mysore 87 I.T.R. 5.11. F Relying on the said decision in JCapadia's case and on a consideration of the scheme of the Act and the provisions there- in referred to, the High Court was of the opinion that the share incume of the assessee s wife and minor children included in the assessee's total income under Section 16(3) of the said Act G should be regarded as business income derived from business carried on by the assessee and in that view of the matter the assessee was entitled to set off his loss carried forward from the previous year. Accordingly, the question referred to in respect of these years was answered in the affirmative and iri favour of the assessee by the High Court. H

c.I.r. v. J.M.GOTLA tSABYASACHI MIJKllARJI, J.J 719

A The revenue has come up in these appeals.

Before the several contentions are dealt with, it is necessary to bear in mind that here what wa• sought to be set off was the loss suffered by the assessee in his business carried forward from the previous · year against the income which was included in view of the provisions of Section 16 (3) of the Act, the relevant provisions of which are as follows:-

"'16. Exemptions and exclusions in determining the total income- c (3) In computing the total income of any individual for the purpose of assessment, there shall be includ?.d - --· (a) So much of the income of a wife or. minor child of such indl.vidual as arises directly or indirectly - D

(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; E

(iii) from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart; F (iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration."

Section 10 of the Act provides for the computation of income and states, inter-alia, that the tax shall be payable by an G assessee under the head "profits and gains of business, profession or vocation"' in respect of the profits or gains of any business, profession or vocation carried on by him and sub-section (2) indicates what are the allowances that are allow- able in making such computation. It is not necessary for the present purposes to set out in detail the said provisions. H

The relevant provision of sub-section (1) of Section 24 so far as is material for the purpose of the present case, was as follows:

•

720 SUPR.EMr; GOURT REPORTS [1985] 5UPP.2 s.c.R.

A "Where any assessee sustains " 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." " B It' fs not necessary to refer to tne provisions whi.ch deal with speculative losses and the exceptions indicating the speculative losses.

The relevant provisions of sub-section (2) of Section 24

c which are material for the present purpose are: ;! "Where any assessee •ustains 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 buBin1:i"ss, profession or vocation, and the loss cannot be wholly set off under sub-section (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 tnat year:

(ii) Where the loss was 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; and

(iii)" if· the loss· in either case cannot be wholly ·so set off, the amount of loss not so set off Shall be carried forward to the following year and so on but no loss shall be so carried forward for more than eight years:

Reliance was placed on behalf of the revenue on the decision of ·· the Gujarat High Court in the case of Dayalbbai Madhavji Vadera v. Callldssioner of IDcome-Tax, Gujarat (supra). In that

, C.I.T. v. J.M.GOTLA (SABYASACHI MUKHARJI, J.] 721

decision, .the di vision bench of tne Gujarat High Court observed that where the share of the wife or minor child in a firm in which the assessee was a· partner was a loss, such loss could not be included in the total income of the assessee. The term 'income' the Gujarat High Court noted, had not been defined in Section 16 (3) of the said Act. Though 'income' might in certain cases include negative income namely, loss, but. such a B construction was not favoured according to the. Gujarat High Court, by Section 16 (3) of the Ai:t. The Gujarat High Court was of the view that the section created an artificial liability. The expression 'includes ' in clause (a) of sub-clause (iii) prima facie, .carried the concept of adding rather than subtracting, deducting or setting off. Section 16 (3) provided, according to c the Gujarat High Court, only for inclusions in the total income of an individual and did not create.any legal fiction whereby the income of another was deemed to be the income of the individual. Therefore loss arising under any one of the sub-clauses of Section 16 (3) (a) could not be set off against income falling under the other or the rest of the sub-clauses. If such a set-off were to be made, it would .result in a benefit to the father or the husband of the individual• Such a construction would be contrary to the provisions of Section 24 of the Act under which it would be the person to whose share the loss fell, who alone was entitled to a set-off,

In that case two contentions were urged for the assessee before the High Court: (1) that the term "income" as used in Section.16 (3) (a) would also includ.e negative income i.e., loss, and (2) that while ascertaining what is to be included in the total lncome of. an assessee under. Section 16 (3) (a), the lncome:-Tax Officer had to take . the totality of all the income under the four sub-clauses of clause (a) of Section 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 ~lause (a) of Section 16 (3) such loss had to be set off against the Lncome or the profits or gains acruing 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 Income-Tax Officer sought . to include therein the income of the assessee 's irl.f e or the minor child arising from membership of the wife in the firm in which the assessee was a partner or from the H admission of the minor son to the benefits of partnership in that

p. 722

A firm and- the income arising from the assets transferred to the wife and the minor son, the Income-tax Officer 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 business. of that firm or from the transferred assets, and then add only the balance, if any. The question that fell for consideration before B the Gujarat High Court as whether this could be accepted as a true and proper construction of Section 16(3) of the act. The High Court noted that the section obviously aimed at preventing an attempt on the part of the assessee to avoid or reduce the inciden~e of tax either by transferring his assets to his wife or minor child or by admitting his wife or minor child to the benefits of partnership in which he is a partner. c The scheme of clause (a) in sub-section (3) was not to set off loss, according to the High Court, arising under any one of the sub-clauses against income arising from the other or the rest of the sub-clauses. Such a thing perhaps might have been possible if, instead of providing for the inclusion of income of wife or minor child in the total income of an assessee, such income had, by a legal fiction, been made the income or the share of the assassee himself. The High Court noted that that had not been done. The High Court was of the opinion that while enacting sub-section (3), the legislature had before it the deeming fiction in Section 16(l)(c). Sub-section l (c) of Section 16 of the Arbitration dealt with the income arising to any person by virtue of a settlement or disposition whether revocable or not, and whether effected before or after the commencement of the Income-tax (Amendment) Act, 1939, from assets remai,Vfng the property of the settlor or disponer, would be deemed to be income of the settlor or disponer, and all income arising to any person by virtue of a revocable transfer of assets should be deemed to be income of the transferor. Here this unlike clause (c) of sub-section (1) and sub-section (3) of Section 16, provides for inclusion of certain income for the purpose of assessment in deemii:tg such income to be the income of the asseasee. _The High Court referred to the decision of the Privy Council in the case of Lawless v. Sullivan 1881 6 App. Cas.373. G On behalf of the revenue, stress was laid on the decision of the Gujarat High Court, but as would be evident from the facts narrated before, the facts of the instant case are materially different. The present case is not a case where the wife or the child to whom the assets had been transferred had suffered any H loss in a year subsequent to the year of transfer. Here is a case

' C. I. T. v. J .M.GOTLA [SABYASACHI MUKHARJI, J.]

where the htiSband has suffered loss in a year subsequent to the 723

transfer of certain assets, income arising out of which is sought to be included in the assessee's income. The question here is in A

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 Section 16(3) of the Act, used the expression 'deemed to be the income' B in contradistinction to the same expression used in Section 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. c Income-tax Act, 1922 was replaced by Income-taic Act, 1961. Section 64 of the Income-tax Act, 1961, (hereinafter referred to as '1961 Act') deals with inclusion of income of the assessee arising out of the assets transferred directl~ or indirecty to the spouse or the minor child. The provisions of significant aspects are similar to the provisions of Section 16(3) of the Act except that in Section 64 of 1961 Act, the expression 'spouse' has been used unlike 'wife' used in Section 16(3) of the Act.

Section 70 to 72 of 1961 Act contain provisions similar to Section 24 of the Act. Sub-section (1) of Section 24, as noticed, provides that where any assessee sustains a loss of earns 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.

Counsel for the assessee contended, and in our opinion rightly, that in the first year when the assets are transferred to the wife or. the minor child then the loss has to be taken into account in computing the profits and gains arising out of the user of assets so transferred in order to compute the result. This, in our opinion, is the plain meaning of the section. The difficulty, however, arises in a case where loss is sustained by an assessee in any other business, profession or vocation in a succeeding year. In such a case loss so sustained by him in any other business, profession or vocation can be carried forward and set off against the profits or gains, if any, of any business, profession or vocation carried on by him in that year (emphasis suppled); provided the business, profession or vocation in which the loss was originally sustained continued to be carried on by

p. 724

A him in that year. Therefore, to set off the carried forward loss of the assessee, two conditions were required to be fulfilled under Section 24(2) of the Act, firstly, the business, profession or vocation must be carried on by him in that year and secondly, that the business, profession or vocation in which loss was originally sustained mJSt continue to be carried on (emphasis B added) by the assessee in the year in question. The High Court has noted that there are three conditions: (1) the loss must be loss in a business; (2) the business, profession or vocation in which the loss was originaly sustained must be continued to be carried 6n by the assessee in the year in which the carried for- ward loss is sought to be set off; ·and (3) the business, c profession or vocation against the profits of which set off is claimed must have been carried on by the assessee in that year. That the loss is from business is not disputed in this case. From the facts noted before, it is also evident that the business in which the loss >fas originally sustained was continued to be carried ori by the assessee in the year in which the carried for- ward loss is sought to be set off. But the question is was the D assessee carrying on the business from which the share income of his wife and minor children was derived? This is also a condi- tion which is required to be fulfilled.

In Section 4 of Wealth Tax 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 beloogl.ng to that individual" (emphasis supplied). Then the different items including the items of assets transferred have been mentioned.,The Income-tax Act only makes these as includible as such while the Wealth-Tax Act makes these includible as F beloogl.ng to the assessee. It is not necessary to examine whether in view of Section 2(m) of the Wealth-Tax Act read with Section 3 of the said Act- which is the charging section, such a provision, was necessary unlike Section 10 and Section 2(6C) read with Section 3 of the said Act.

G Reliance was placed on behalf of the revenue on the decision of the Madras High Court in the case of r-cimn1ssloner of Income-tax, Madras-I v. A.L. Srinivasan 108 I. T.R. 667. The assessee in that case had claimed set off of the losses carried forward by him from prior years in his individual assessment against the· share income of his wife from a partnership firm in which he was also a partner and which was included in his assess- ment by reason of Section 16(3)(a). The Tribunal held that the

, C.I.T. v. J.M.GOTLA [SABYASACHI MUKHARJI, J.] 725

business carried on by the firm could be treated as a business carried on by the husband though the wife was a partner in the said firm and hence the carried forward loss was allowable against her share income from the firm included in the husband's income. In those circumstances, it was held.that in the context of Section 24(2)(ii) of the Act, .it was difficult to hold that the business in that case was wholly carried on by the husband assessee or that the inci>me wholly belonged to him and, hence, on the language of Section 16(3) read with Section 24, the TribunE.l's view was not justifoed.

There the Division Bench of the Madras High Court held that the language of Section 16(3)(a) of the Act showed that the income earned by the wife retained its . character as her income and was not converted into the income of the husband for all purposes. The inclusion of the income of the wife was only for the purpose of taxing it in the hands of the husband. But the identity of the income of the wife was not lost. The principle u;iderlying Section 24(2)(ii) of the Act was to restrict the lJ set-off· only to the business income 0f the year to which it was carried forward so that the loss sustained by the assessee in any other business, profession or vocation could be set off against the income from ·any business, profession or vocation carried on by him in that year. Though, for certain purposes, the business carried on by the firm is treated as the business carried on by the partner, still fol' applying section 24(1) the statute E required that the income against which the set off was claimed should beiong to the assessee and this requirement was not excluded by Section 24(2). Facts of the case were also different inasmuch as 'the husband was not a ·partner in the firm in the pre·sent · case • . F Several propositions were canvassed before us on behalf of the assessee.- the main one being that the court should consider the purpose of the section for· the proper construction of the relevant provisions of the Act. It is manifest, as contended for on behalf of the assessee, that the object of Section 16(3)(a) was to foil an 1ndiVictual Is attempt to reduce the incidence of G tax by transferring his assets to his wife or ininor child or by admitting his wife as a 'partner or his minor child to the benefits or partnership in a firm in which· he w'as a partner by transferring the assets·directly or indirectly to them otherwise than for adequate consideration. H This Court in the case -of Coamissiaoer of · Income-t!lx, Bombay v. ffanilal Dhanji 44 I.T.R. 876, dealing with Section 16 of the Act observed at page 881 of the report thus:

p. 726

A "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 liabil- ity 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 B 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 or admitting his wife as a partner or admitting his minor child to the benefits of a partnership in a firm in which such individual is a partner. The sub-section creates an artificial liabil- c ity to tax and 1m1st be strictly construed."

Attention was drawn in this connection to a circular of the Board of Revenue - C.B.R. Circular No. 20 of 1944, which reads thus:

"C.B.R. Circular No.20 of 1944. C.No.4(13)-I.T./44, D dated the 15th July, 1944.

Subject: Section 16(3)(a) - Loss i.ncurred by wife of minor child - Right of set off under section 24(1) and (2). E Attention is invited to the Board's Circular No. 35 of 1941, on the above subject. It was laid down therein what where the wife or minor child of an individual incurs a loss which if it were income would be includible in the income of that individual under section 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 section 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 lnss sustained by that individual. Thus if the wife, or minor- child has a personal lncome of Rs. 5, 000 which is not includible in the individual's income and sustains a lOss of Rs.10,000 from a source ::he income of whiCh would be inclu.dible, in the income of thQ individual, :.:he loss &.hould be set off against the

C.I.T. v. J.M.GOTLA [SABYASACHI MUKllARJI, J.j 727

A income of the individual under section 24( 1), and if not wholly set off should be carried forward under section 24(2). The wife or the minor child would, therefore, be assessable on the personal income of J!s.5,000. 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."

It was further submitted that the circular of the Board of Revenue would be binding on all the officers. Reliance was placed on the observations of this Court in Navnitlal Javeri v. LL c Sen, Appellate Assistant Comniseiooer of Inc.- Tax Bombay, 56 I.T.R. 198 at page 203. It was urged.that though the circular was no~ binding on the aasessee, i t was binding on the revenue. In our opinion, it was Uot necessary for the purpose of disposing of these appeals to refer to this aspect at all. These appeals do D not involve the question of set off of loss sustained by the wife or the minor children of the assessee and brought forward by the wife or minor children to be set off from the income included from the partnership firm carried with assets transferred by an assessee to his wife or min9r children subsequent to the year of transfer. 'nlerefore, the 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 aasessee 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 aasessee in any year subsequent to the year of transfer could be set off against any loss brought F forward by the assessee in respect of a business carried on 'by the assessee. In the instant case, the business of the firm in which assessee's wife and to the benefits of which his m!nor children ruid 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. G that the real object of Section 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 nad not taken place. It was his suhnission that if the transfer had not taken place, the income of the wife and the minor children from the assets transferred viz., machinery in this H case, would be the income of the assessee. In other words, it would be incoine from his business if the transfer was ignored. In

p. 728

A that case loss from business could be carried f o.-ward for six to eight years as the case may be, to be set off against the business income of the assessee. Counsel urged that the object of the said section was not to punish the assessee for having trans- ferred his assets to his wife or mino.r children by denying any allowance, concession, deduction, etc. to which he or others l! would otherwise be ·entitled to. There is substance in this ~ontention. In order, however, to obtain set off of carried for- ward loss, two conditions had to be fulfilled. When the circular dated 15th July, 1944 as mentioned before, was issued, the present problem involved in these appeals was not dealt with. When 1961 Act was enacted, this was . also not clarified. The requirement of Section 72 which replaced Section 24(2) of the Act c proceeds substantially on previous basis.

In view of the facts and circumstances of the present case, it is also not necessary to deal in detail with the Kerala High Court decision in the case of Camlissioner of lncalle-1"", Kerala II v. Smt Mary Ignatius 141 I.T.R. 954. Though the inclusion of the income of one in the income of another arose in that case D under Section 16 of the Act and Section 64(1)(11) of 1961 Act, the question that falls for consideration in the present case did not fall for consideration in that case.

Dealing with the Madras High Court judgment in Camlissioner of Income-Tax, Madras-I v. A.L. Srinivasan (supra), Foti, Acting E CJ observed at page 960 thus:

, • "Section 24(2) (ii) allowed a set-off of the loss 1 •• sustained by. a person in any business against the gains of any business carried. on by him during that year. For the purpose of the section, it cannot be said that the income .that he derived as a partner from the firm, which was doing business, was not income from business carried on . by him in that year •. The question· that the court had really to deal with was whether the wife's income was part of the husband's income. If it was part of his income it could be set off against the loss of that year whatever be the head under which the losses are incurred."

It Would be necessary, however, to examine whether in view of the facts of this case and in the light of the requirement of Section 24(2) of the Act, whether the losses suffered by the husband in th~ previous year can be carried forward and set off

c.1.r. v. J.M.GOTLA (SABYASACHl MUKHARJI, J.J 729

against the income cf 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 Coamissiooer of Income-Tax, M.P-1 v. Badr1 Prasad Agarwal 142 I.T.JL 353 held that the addition of Explanation 2 to Section 64 of 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 Section 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 Section 64 0 f the Act of 1961 includes loss. C Furthermore Explanation 2 added by Finance Act, 1979 to Section 64 in specific terms says that 'income' would include loss. But that Explanation even on the assumption that this is a parliamen- tary exposition of the existing position would not solve the present problem. D The Bombay Hi.gh Court in the case of R.M. l;ocioldas V·• Coumissioner of Income-Tax, Bombay 151 I.T.R. 67, had to consider this aspect. CBK's Circular No. 20 in which the Bo~rd had taken the view that where the wife or the minor child of an individual incurred a loss which if it were income would be includible in the income of that individual under Section 16(3) cf the Income-tax Act, 1922, such loss should be set off against the E income of the individual, -was withdrawn- on 6th April, 1972. Subsequently, Section 64 of the 1961 Act was amended by the Finance Act, 1979 with effect from 1st April, 1980 by insertion of Explanation 2 after sub-section (2), whereby for the purpose of this section, income would include loss. The Explanation must be regarded, according to the Bombay High Court, as being clari - F ficatory in nature as reflecting the correct legal position. both under Section 16 of the Act as also .under Section 64 of the 1961 Act and the proper approach to the specified provisions for aggregation or clubbing. The Explanation added to Section 64(2) must_ be regarded as a parliamentary exposition, according to the Bombay High Court, of the meaning of the word '.income 1 . as used in the unamended section. Even without the said Explanation, for the purpose of clubbing, income or profit13 w~uld include negative income or negative profits, that is, loss also. Tl).~refore, even during the period between the withdrawal of the Circular in 1972 and the amendment of Section 64 with effect from 1st April, 1980, the loss incurred by the wife or minor' chil.d was includible in the income of the individual. Hence, the loss app9rtioned tO the

730 SUPREME COURT REPORtS [1985] SUPP.: s.c.R.

A wife in a firm in which her husband was also a partner in includible ir. determining the husband's total income or total loss.

On behalf of the assessee, it was contended that the only purpose of the loss incurred by the wife or minor child. being li included in the total income of the assessee was to enable the assessee to have a set off under Section 24\1) and Section 24(2). There is good deal of substance in the view. Looked at from one point of view it is possible to accept the position that would be the effect, i.e. to enable the assessee to have a set off under Section 24(2) of the Act. This inclusion of the loss sustained by the wife or minor children in the total income of the assessee is to a certain extent as effective as deeming the income of the wife or minor child to be the assessee's income. In view of the definition of 'total income', argued counsel, in oection 2 (15) the income has to be processed under the relevant section (e.g. Section 10 in the case of business) and deductions, allowances and exemptions are to be granted 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 C.I.T. Kerala V• P.K. Kocbalmu Allina Perol<e 125 I. T .R. 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 Section 139 of the 1961 Act and Section 271 (1) (c) of 1961 Act would include such income to be included in the assessee's total income.

This Court has also held that the assessee was ~ntitled to earned income relief in relation to such ixome - see r.oumis- aioner of Income Tax v. S.A.S. Martmuthu Hadar 44 1.r.R. 1. In other words, the income was in no way different from assessee 's income for the purpose of this Ac:.t. Therefore, the provisions of 5ection 16(3) of the Act have the same effect as the words 'deemed to be' used in Section 16(l)(c). S;l.nce both income as well as loss of the wife or minor child, argued counsel for the G assessee, has to be included in the assessee's total income and are to be treated as the assessee 1 s income or loss for the purpose of the Act, the effect was that there was complete identity between the assessee and' the minor child as regards assessee 's income and such income to be included in his total income. H

C.I.T. v. J.M.GOTLA [SABYASACHI MUK!lARJI, J.] 731

Counsel stressed on the inequitable result of strict literal A interpretation of treating the business of the wife or minor child as being one not carried on by the ·assessee. He posed before us by way of illustration where the assessee's incom~ in one year is small - say Rs. 10,000 the business loss of the wife or minor child to be included in his income in that year is large - say Rs. 1 lakh, there results a loss for Rs. 90,000 which can- ll not be dealt with in the assessment of the wife or minor child. If in the next year, the business of the wife or minor child yields a large profit - say Rs. l lakh, the entire profit of Rs.l lakh would become assessable in the. hands of the assessee, but the unabsorbed loss of the earlier year (Rs.90,000) would not be allowed to be set off, if on a strict literal interpretation, c the business of the wife or minor child is treated as one not carried on by the assessee. The wife or minor child also·would be denied the set off as the income has to be included in the assessee's income. This results in an inequitable position which could not have been intended by the Parliament, i.e. to counter- act the object of transfer only and not to punish tne assessee or to deny him any allowance or deduction which the assessee weuld have otherwise been entitled to.

The question in the instant case is within a She.rt compass. It can be accepted without much doubt that income would include loss. If it were a question of inclusion of the income of the wife or minor child to whom assets have been transferred by the assessee and with which the business was carried on or by which income was derived by the wife or the minor child, then in including that income either of the wife or minor child, such income should be computed in accordance with Section 10 and other provisions of the Act i.e. including Section 24(1) and Section 24(2) of the Act. But· the question that arises here is whether against the inclusion of such income, los.s suffered by the assess·ee. in a previous year which was carried forward under Section 24(1) of the Act should be allowed to be set off or not. The revenue contends that it cannot be. It lays emphasis on the fact that set off for the carried forward loss is permitted only by Section 24(2) of the Act and there should be strict literal construction of Section 24(2) and as such in view of the provisions of Section 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 H business, profession or vocation in which the loss was originally

p. 732

A sustained continued to be carried on by him in that yesr'. 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 yesr. But 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 B in the subsequent yesr 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 Circular in 1944 and in spite of the additioa of Explanation 2 to Section 64(2) by Amending Act of 1979 with effect from 1980. Therefore, it was urged that legislative intent c was clear and it was not possible to hold otherwise.

On the other hand on behalf of the assessee it was contended that it would often result in extreme anomaly and hardship, for instance in the example noticed before. It was further stressed on behalf of the revenue that equity "has no place in interpreting fiscal legislation. D We need not, for the purpose of the instant case, express any opinion whether circulars in the instant case should be construed as contemporaneous exposition of the Legislative intent". The question was discussed exhaustively in the case of Deah Bandhu Gupta and Co. and Others. V• Delhi Stock Eycbange E _Association Ltd. [1979] 4 S.c.c. 565.

Our attention was also drawn to the decision in the case of Manickam"and eo. v. 'lbe State of Tamil Nadu 39 s.T.c. 12 at page 18 as well as Craies on Statute Law (Sixth Ed.) page 147.

F In ·the case of K.P. Verghese v. Income-Tax Officer, Another 131 I.T.R. 597, this Court emphasised that Ernalmlll!D and a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided.

Where the plain literal interpretation of a statutory provi- G sion produces a manifestly unjust result which could never have been intended by the legislature, the Court might modify the language used by the legislature so as to achieve the intention of the legislature and produce a rational construction. The task of interpretation of a statutory p=ovision is an attempt to discover the intention of the Legislature from the language used. H It is necessary to remember that language is at best an imperfect

c.I.T. v. J.M.GOTLA {SASYASACHI MlJKHARJl, J.] 733

instrument for the expression of human intention. It is well to A remember the warning administered by judge Learned Hand that one should not make fortress out of dictionary but remember that statutes ·always have some purpose or object to accomplish and sympathetic and imaginative discovery is the surest guide to t'ieir meaning. ll We· have noted the object of Section 16(3) of the Act which has to be read in conjunction with Section 24(2) in this case for the present purpose. In the purpose of a particular provision is easily discernible f ri>m the whole scheme of the Act which in this case is, to counteract, the effect of the transfer of assets so far as computation of income of the assessee is concerrt.ed then bearing that purpose in ruind, we should find out the intention from .the language used by the Legislature and if strict literal consttuction leads to an absurd result i.e. result not intended to be subserved by the object of the legislation found out in the manner indicated before, a..~d if another construction is possible apart from strict literal construction then that consturction should be preferred to the strict literal construction. Though equity and taxation are often strangers,. attempts should be !Df.de that these do not remain always so and if a construction results in equity rather than in in--justice,, 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 pruposes the business from which profit is included.or loss is set off is treated in various situations as asses see' s income. The scheme of the Act as worked out has been noted before. F In view of the aforesaid and in view of the attiLude 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 Act where the wife or minor child carries on a running business, the right to carry forward the loss in the running business ·would be available to G the wife or minor chilC if they themselves were assessed but the right would be completely lost if the individual in whose total income the loss is to be included is not permitted to carry forward the loss under Sectio'.1 24(2) since that would be the result of the strict literal construction it is apparent that that could not have been ·the intent of the Parliament. Therefore, H where Section 16(3) of the Act operates, the profits or loss from

p. 734

A a business of the wife or minor child included in the total income of the assessee should be treated as the profit or loss from a 'business carried on by him' for the purpose of carrying forward and set off such loss under Section 24(2) of the Act.

B On a consideration of the scheme of the Act and the provisions therein as noted before, the share income of the wife and minor children included in the assessee's total income under Section 16(3') of the Act should be regarded as business income derived from business carried on by the assessee and in that view of the matter, the assessee is entitled to set off his loss carried forward from the previous years.

In the premises the question must be answered in the affirmative and in favour of the asses see. The appeals accordingly fail and are dismissed. In the facts and circumstances of the case, we make the parties pay and bear their respective costs of these appeals. C.M.P. No. 97 of 1973 for condonation of delay is allowed.

N.V.K. Appeals dismissed.