TMI Blog1965 (8) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... er the provisions of section 16(3) of the Act. The assessee was a partner along with four others in a firm which carried on business of manufacturing tea under the name and style of Terrace Nilgiri Tea Estate Co., Naduvattam, Ootacamund. This firm has been granted registration. All the partners of the said firm are non-residents and they are the assessee having 10/100, share, Smt. Prabhakunvarbai Dayalbbai, the assessee's wife having 10/100 share, the assessee's minor son, Rasikchandra Dayalbhai having 20/100 share and Vinodkant Dayalbhai and Narendrakant Dayalbhai, the assessee's sons having a share 30/100 each. The deed of partnership is dated February 2, 1956. The relevant clause of the deed is as follows: 4. The parties shall share the profits and losses in the same proportion as the capital contributed by them, viz.: First party ... 10 per cent. Second party ...10 per cent. Third party ... 30 per cent. Fourth party ... 30 per cent. Rasikchandra Dayalbhai Vadera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A copy of the Income-tax Officer's order for the year 1958-59, in the case of Terrace Nilgiri Tea Estate Co., Naduvattam, is annexure B and forms part of the case. The assessee's wife and minor son had certain deposits in the Bank of India Ltd., Bombay. In respect of the deposit in the name of the wife, a sum of ₹ 9,583 was earned as interest. A similar deposit in the name of the minor son earned interest of ₹ 9,890. These two sums were added to the income of the assessee under the provisions of section 16(3). 3. For the assessment year 1958-59, the income of the assessee's wife was as hereunder: Rs. Income from interest 9,583 Share in registered firm of Terrace Nilgiri Tea Estate Co., Naduvattam, as per order of assessment passed by the I.T.O., Ooty Loss 1,132 8,451 Rs. Income from interest 9,890 Share in registered firm of Terrace Nilgiri Tea Estate Co., Naduvattam Loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as follows: 4. It is common knowledge that section 16(3) was enacted to prevent evasion of tax. Section 16(3)(a) does not come into operation unless there is income of a wife or a minor child. If there is no income of the wife or a minor child at all, section 16(3)(a) cannot come into operation. In this view of the matter the word 'income' used in section 16(3)(a) will and does mean only positive income and not the loss. I am, therefore, of the opinion that the Income-tax Officer was justified in excluding from the income of the appellant, the share of loss from the above firm of the appellant's wife and minor son. A copy of the Appellate Assistant Commissioner's order for the year 1958-59 in the case of the assessee is annexure D and forms part of the case. 6. The assessee preferred a second appeal to the Tribunal and it was contended that the losses apportioned to the wife and minor son of the assessee ought also to have been taken into account in computing the total income of the assessee. Here again no specific ground relating to the set-off of the losses of the wife and minor son against their respective other incomes before inclusion in the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the assessee or not? (2) Whether, on the facts and circumstances of the case, the loss-share of the wife and minor son of the assessee should be set off against their other income includible under section 16(3) Of the Income-tax Act, 1922, before including the same in the total income of the assessee or not? . B. R. Shah and B. P. Parikh, for the assessee. J. M. Thakore (Advocate-General) withM. G. Doshit (Additional Government Pleader) for the commissioner. JUDGMENT J.M. SHELAT C.J.- This reference involves a short question as to the construction of section 16(3)(a) of the Income-tax Act, 1922. The question arises out of the assessment of the assessee, Dayalbhai Madhavji Vadera, a non-resident individual, for the assessment year 1958-59, the corresponding previous year being the year ending March 31, 1958. The assessee's income arose from property, interest, dividends and a share in a registered firm carrying on business in the name of Terrace Nilgiri Tea Estate Co., Naduvattam, Ootacamund. The income of his wife, Prabhakunvarbai, and his minor son, Rasikchandra Dayalbhai, who were also non-residents, from interest and share in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,624 The Income-tax Officer, while assessing Dayalbhai, included in his total income the incomes from interest derived by the said Prabhakunvarbai and the said minor, Rasikchandra, but refused to take into account the respective amounts of losses allocated to them. In doing so, the Income- tax Officer observed that the share of loss of the wife and the minor son could not be taken to the assessee's assessment, for such a loss could not be considered to be income. Aggrieved by this order, the assessee preferred an appeal before the Appellate Assistant Commissioner. It was contended in that appeal that the Income-tax Officer was in error in holding that the share income of the wife and the minor son arising out of their respective shares in the said firm in which the assessee was a partner, though assessed at a loss, was not to be taken into account, while computing the total income of the assessee. The Appellate Assistant Commissioner rejected that contention observing that section 16(3) was enacted to prevent evasion of tax, that it did not come into operation unless there was income of a wife or a minor child and that if there was no positive income of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the four sub-clauses of clause (a) of section 16(3), such loss has to be set off against the income or the profits or gains accruing or arising under another head, and it would be the resulting balance which has 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 seeks to include therein the income of the assessee's wife or the minor child arising from membership of the wife in the firm in which the assessee is a partner and from the admission of the minor son to the benefits of partnership in that firm and the income from 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 has 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 is whether this contention can be upheld on a true and proper construction of section 16(3). Sub-section (3) of section 16 provides as follows: 16. (3) In computing the total income of any individual for the purpose of assessment, there shall be incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, certain income of his wife or minor child. Prima facie, there is no concept of any set-off in the sub-section and the reason is clear, for the mischief that the sub-section seeks to avoid is preventing any assessee avoiding tax by admitting his wife in the partnership as a partner or admitting his minor child to the benefits of partnership in the firm of which he is a partner, or by transferring assets to his wife or to his minor child. As already stated, it is an artificial liability to tax and the object clearly is to add to his total income the income of his wife and miner child arising from the two circumstances set out in clause (a) of sub-section (3). It will, however, be seen that section 16(3) nowhere defines income . The question, therefore, is, does the term income , as used in section 16(3), i.e., income of the wife and the minor child, include his or her share in the loss of the business in respect of which the wife is a partner and the minor child has been admitted to the benefits of partnership? Looking to the sub- section, it is plain that no such idea is expressed or occurs therein, and what is simply provided in sub-section (3) is that while computi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome , but that again is only an inclusive definition and by that clause what is done is to include, over and above the income under its ordinary meaning, seven artificial items. Therefore, income includes not only these seven items, all of which are positive items, but also things signified by the expression income in its ordinary and well-understood meaning. Clause (15) of section 2 defines total income but that clause also only provides that the expression means total amount of income, profits and gains referred to in sub-section (1) of section 4 computed in the manner laid down in the Act. It will be noticed that the total income there defined is the total income chargeable under the Act and as provided under section 4(1). What the Income-tax Officer, therefore, has to do under section 16(3), wherever it applies, is to find out whether there is income coming to the wife or the minor child of an assessee under any one or more of the sub-clauses in clause (a), and if he finds that there is, he has to include it in the total income of the assessee. It is not as if he is called upon to work out the totality of all the sub-clauses (i) to (iv) and then add to the total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving at the true income of such an individual. He contended that that process has to be followed for the purpose of computing the amount which has to be included under section 16(3) in the total income of an assessee. In our view, this decision can have no application to the facts before us, for the decision dealt with the construction of section 42(3). What sub-section (3) of section 42 does is to make provision for allocation of profits in respect of the different operations of a single business. It provides that in the case of a business of which some of the operations are carried out within and some outside the taxable territories, the profits and gains of the business should be apportioned and only that portion of profits which can be attributable to the operations carried out in the taxable territories should be deemed to accrue in the taxable territories. What this decision, therefore, lays down is that while computing profits arising from operations which are carried out in taxable territories, the Income-tax Officer must find out the actual and overall result of such operations and in computing profits and gains of such operations, he must take into account the losses whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder any one of the heads has to be set off against income under any other head in that year and that is how one arrives at the true income of the assessee. But that principle applies to the computation of the total income of an assessee. It obviously cannot apply to a provision, such as section 16(3), which, as we have already pointed out, creates an artificial liability and provides for the inclusion or addition of the income of a *[1881] 6 App. Cas. 373. person other than the assessee. It is not a provision for computation of the total income of such other person where such set-off is to be made for a loss under one head against profit under another head. In our view, neither of these two decisions can further the construction suggested by Mr. Shah and, therefore, the view taken by the Tribunal was, in our opinion, a correct view. If, as suggested by Mr. Shah, income arising under the different sub-clauses in clause (a) of section 16(3) were to be adopted and loss in one were to be set off against income from the other, it would, as already pointed out earlier, be not only contrary to the scheme of section 16(3) but also might work contrary to the provisions of section 24 in cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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