TMI Blog1981 (7) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... idual from the membership of the spouse in a firm carrying on a business in which such individual is partner. " In essence it provides that when the husband and the wife are members of the very same partnership firm carrying on a business, the income of the two is to be clubbed together. In so far as the income arising directly or indirectly from the business of the partnership is concerned, such clubbing together would naturally result in a higher rate of tax being attracted having regard to the fact that income-tax at a higher rate is levied in regard to the slab of income which is in a higher bracket. The assessee is, therefore, interested in escaping the clutches of this provision. The revenue on the other hand would be anxious to call into aid this provision in case any question of interpretation arises which would result in an assessee being in a position to successfully contend that the provision would not be attracted in his case. Such a question has arisen in the context of a partnership firm between two spouses who happen to be professionals. Each of them is a qualified medical practitioner (doctor), The husband and the wife team of doctors have formed a partnership an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from Bhuj (I.T.A. No. 167/ 81). If we negative the plea of the revenue that the Income-tax Tribunal was wrong in holding that the provisions concerned would not be attracted in the case of a husband and wife couple carrying on a " Profession " in partnership, these three applications must of necessity fail. That is why these three applications have been tagged on and are being disposed of along with the aforesaid three references. These three Income-tax Applications will also be disposed of by this common judgment. For the purposes of the present judgment it will be sufficient to advert to the facts giving rise to Income-tax Reference No. 193/78 which may be treated as typical for the entire group. The facts pertaining to the each of these matters need not, therefore, be unnecessarily stated. In the allied references and the I.T. applications an indentical question of law arises on similar facts. The following facts are not in dispute: (1) The assessee, Dr. K. K. Shah, is a qualified Gynaecologist. His wife, Dr. Mrs. Haribala K. Shah is also a qualified Gynaecologist. (2) Both of them are carrying on their profession as Gynaecologists in partnership with each other un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indirectly-- (a) so much of the income of a wife or minor child of such individual (i) to the spouse of such as arises directly or indirectly- individual from the membership of the spouse in a firm carrying (i) from the membership of on a business in which such the wife in a firm of which her husband individual is a partner is a partner. (Emphasis added) It is necessary to stress the circumstance that s. 16(3)(a)(i) of the old Act has undergone a metamorphosis in the corresponding provision contained in s. 64(1)(i) of the new Act. An analytical study of these provisions would reveal the following features: (1) Section 16(3)(a)(i) of the old Act provides for the clubbing together of the income of the wife with the income of the husband when the income of the wife is derived directly or indirectly (what follows is of great significance) " in a firm of which her husband is a Partner ". In other words, the mere membership in the firm on the part of a wife would attract the clubbing provision and the income arising to the wife from the firm would be clubbed with the income of her husband. (2) As against this, under the corresponding provision in s. 64(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commerce or manufacture or any or concern in trade, commerce, or manufacture adventure the nature of trade, commerce or any adventure or concern trade, in the commerce or manufacture ." nature of trade, commerce or manufacture. " The expression "profession " has The expression " profession " has not been been defined by section 2(36) as under : defined. " 'profession includes vocation. " It takes within its sweep the expression " vocation ". Section 28 which is the charging Section 10(1) refers to business, section treats professional income profession or vocation. as of a different category from that of business income as is evident from the opening words : " The following income shall be chargeable to income-tax under the head 'Profits and gains of business or profession ' (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;... (iii) income derived by a trade, professional or similar association from specific services performed for its members ; (iv) the value of any benefit or perquisite, whether convertible into money or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho has been made a partner only for the sake of escaping the rigour of tax liability. It must be realised that when an individual forms a partnership with a stranger, even if the stranger agrees to be a nominal partner, the person who enters into such arrangement runs a risk because the stranger may assert his right and may not agree to make over the amount falling to his share to the real partner. There would be no such risk when a wife is introduced as a partner. That is conceivably the reason why s. 16(3)(a)(i) has introduced the clubbing provision. The situation, however, would be altogether different when a professional couple, say doctor-couple, enters into a partnership. Each of the two can carry on his or her profession in his or her individual capacity. Each of them can also enter into a partnership with other members of the same profession. In that event, their professional income would be assessed separately and no question of clubbing would arise. It must also be realised that doctor-husband cannot form a partnership with a wife who is not a doctor in order to carry on his profession. The rules of professional ethics would not permit this. It would be unethical to do so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the change sought to be introduced in this sphere by the new Act. The speech has been reproduced on page 33 of the Treatise on the Income-tax Act, 1961, by S. C. Manchanda, K. Srinivasan B. Malik in Volume I of the 1st Edn. of 1962. The relevant extract from p. 37 may be quoted: " A provision which will be of interest to persons engaged in the professions is that in clause 64. Under the existing law if a husband and wife are partners in the same firm, the share income of the wife is clubbed with that of the husband, who has to pay tax on the income so aggregated. The Law Commission has expressed itself against this provision as applied to Partnerships between husband and wife engaged in professions as doctors, lawyers, etc. The Commission has recommended that such cases should be exempt from the operation of the provision. The Government has accepted this suggestion and the Provision has been suitably modified." Two salient features required to be highlighted are: (1) that the Law Commission had expressed the opinion that the clubbing provision should not be applied to the husband and wife partnerships engaged in professions such as doctors, lawyers, etc., and (2) that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be clubbed together under s. 64(1)(i). We would, however, add the following riders: (1) If a doctor-husband and a doctor-wife are also carrying on the activity of a nursing home in the context of their professional activity for the purpose of treating their own patients, the income from the nursing home can be treated as the professional income of the professional couple and no question of clubbing together can arise. (2) If any business activity is carried on by a firm constituted by the doctor-husband or doctor-wife such as of running a drug store for selling, drugs to the patients or to others, the income from such activity can be clubbed together. Such income will not be exempt from being clubbed together merely because it is an activity which is adjunct to the main professional activity. Similarly, when a doctor-couple carries on the nursing home activity by admitting patients of other doctors and charging fees such as room fees or fees for services rendered to them, it may amount to a business activity carried on by the firm and that part of the income can be clubbed together. (3) Merely because a part of the activity is professional activity, the assessee cannot es ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
