TMI Blog1985 (8) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant assessment years in the purchase and sale of groundnut oil and was also running an oil mill. He was also an abkari contractor. On June 1, 1957, he had gifted away a part of the oil mill machinery, viz., 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 the assessee were also admitted. The mill premises as well as the remaining machinery of the assessee were leased out to this firm which carried on the business of the manufacture and sale of groundnut 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 stipulated rates on the purchase of oil cake and sale of deoiled cake made by the firm. The assessee himself continued to carry on business in the purchase and sale of groundnut cake and oil on a small scale. The assessee also continued his business as abkari contractor. The assessee had incurred huge losses in his individual business in the earlier years which were being carried forward from year to year up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the High Court. The High Court, after setting out the facts mentioned hereinbefore, referred to s. 24(2)(ii) of the Act as it stood in the relevant year. 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; (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 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 on by the assessee in the year in which the carried forward loss was sought to be set off and this aspect was found in favour of the assessee by the Tribunal. The only ground on which the Tribunal had denied the right to set off was that the assessee could not be said to be carrying on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness, profession or vocation " in respect of the profits or gains of any business, profession or vocation carried on by him and sub-s. (2) indicates what are the allowances that are allowable in making such computation. It is not necessary for the present purposes to set out in detail the said provisions. The relevant provision of sub-s. (1) of s. 24, so far as is material for the purpose of the present case, was as follows I " Where any assessee sustains a 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 :" It is not necessary to refer to the provisos which deal with speculative losses and the exceptions indicating the speculative losses. The relevant provisions of subs. (2) of s. 24 which are material for the present purpose are : " Where any assessee sustains 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 business, profession or vocation, and the loss cannot be wholly set off un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... father or the husband of the individual. Such a construction would be contrary to the provisions of s. 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 s. 16(3)(a) would also include negative income, i.e., loss, and (2) that while ascertaining what is to be included in the total income of an assessee under s. 16(3)(a), the ITO had to take the totality of all the income under the four sub-clauses of cl. (a) of s. 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 cl. (a) of s. 16(3), such loss had 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 had to be added to the total income of the assessee. He argued that, while computing the total income of the assessee, when the ITO sought to include therein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncil in the case of Lawless v. Sullivan [1881] 6 AC 373 (PC). 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 loss in a year subsequent to the year of transfer. Here is a case, where the husband has suffered loss in a year subsequent to the transfer of certain assets, income arising out of which is sought to be included in the assessee's income. The question here is in 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 s. 16(3) of the Act, used the expression " deemed to be the income " in contradistinction to the same expression used in s. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 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 was originally sustained was continued to be carried on by the assessee in the year in which the carried forward loss is sought to be set off. But the question is was the assessee carrying on the business from which the share income of his wife and minor children was derived? This is also a condition which is required to be fulfilled. In section 4 of the W.T. 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 belonging to that individual " (emphasis supplied). Then the different items including the items of assets transferred have been mentioned. The I.T. Act only makes these as includible as such while the W.T. Act make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re also different inasmuch as the husband was not a partner in the firm in the present case. 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 s. 16(3)(a) was to foil an individual's attempt to reduce the incidence of tax by transferring his assets to his wife or minor child or by admitting his wife as a partner or his minor child to the benefits of partnership in firm in which he was a partner by transferring the assets directly or indirectly to them otherwise than for adequate consideration. This court in the case of CIT v. Manilal Dhanji [1962] 44 ITR 876, dealing with s. 16 of the Act observed at page 881 of the report thus : " 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 liability 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 foil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is not necessary for the purpose of disposing of these appeals to refer to this aspect at all. These appeals do 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 on with assets transferred by an assessee to his wife or minor children subsequent to the year of transfer. Therefore, 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 assessee 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 assessee in any year subsequent to the year of transfer could be set off against any loss brought forward by the assessee in respect of business carried on by the assessee. In the instant case, the business of the firm in which the assessee's wife and to the benefits of which his minor children had been admitted was a firm in which the assessee himse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 s. 24(2) of the Act, whether the losses suffered by the husband in the previous year can be carried forward and set off against the income of 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 CIT v. Badri Prasad Agarwal [1983] 142 ITR 353, held that the addition of Explanation 2 to s. 64 of the 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 s. 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 s. 64 of the Act of 1961 includes l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der s. 24(2) of the Act. This inclusion of the loss sustained by the wife or the minor child 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 s. 2(15), the income has to be processed under the relevant section (e.g., s. 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 CIT v. Kochammu Amma Peroke [1980] 125 ITR 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 s. 139 of the 1961 Act and s. 271(1)(c) of the 1961 Act would include such income to be included in the assessee's total income. This court has also held that the assessee was entitled to earned income relief in relation to such income-see CIT v. Marimuthu Nadar [1962] 44 ITR 1. In other words, the income was in no way different from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 24(1) and s. 24(2) of the Act. But the question that arises here is whether against the inclusion of such income, loss suffered by the assessee in a previous year which was carried forward under s. 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 s. 24(2) of the Act and there should be strict literal construction of s. 24(2) and as such in view of the provisions of s. 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 business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year ". 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 year. Bat the problem here is that the business out of whose share income of the wife or minor child is derived ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of s. 16(3) of the Act which has to be read in conjunction with s. 24(2) in this case for the present purpose. If the purpose of a particular provision is easily discernible from 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 concerned, then bearing that purpose in mind, we should find out the intention from the language used by the Legislature and if strict literal construction leads to an absurd result, i.e., a result not intended to be subserved by the object of the legislation found in the manner indicated before, then if another construction is possible apart from strict literal construction, then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, 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 lia ..... X X X X Extracts X X X X X X X X Extracts X X X X
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