Vildirect: IncomeTax-caselaws-1985-VIL-258-BOM-DT

1985-VIL-258-BOM-DT

Equivalent Citation: [1986] 159 ITR 203, 50 CTR 275, 24 TAXMANN 29

BOMBAY HIGH COURT

Date: 18.10.1985

COMMISSIONER OF INCOME-TAX

FY. KHAMBHATY

BENCH

Judge(s) : BHARUCHA., KANIA

JUDGMENT

The judgment of the court was delivered by

KANIA J.-These four references arise on a case stated under section 256(1) of the Income-tax Act, 1961. The assessment years with which we are concerned in these references are the assessment years 1967-68 to 1970-71.. The references arise on a common statement of the case and the contentions raised in these references are also the same. Hence, the references are being disposed of by this common judgment. The question which has been referred to us for our determination is as follows :

" Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the share income of the assessee's wife and minor children could not be included in the assessee's hands on the ground that the residential status of the individual alone has to be considered and not of his wife and children for the purpose of section 64(1) of the Income-tax Act, 1961 ? "

The assessee, F. Y. Khambaty, was a partner in the firm of M/s. F. Y. Khambaty & Sons, Kano, Nigeria (referred to hereinafter as " the said firm "). Among the other partners in the said firm were his wife and two minor sons in the assessment year 1967-68 and one minor son in the other three assessment years. The assessee's two major daughters were also partners. In the accounting year relevant to the assessment year 1967-68, the wife and two minor sons of the assessee earned from the said firm a share of income amounting to Rs. 95,561. In the accounting period relevant to the assessment year 1969-70, the wife and minor son earned interest amounting Rs. 13,256 from the said firm. These incomes of the wife and the minor sons were included in the assessee's income for assessment in the aforesaid two assessment years. During the accounting periods relevant to the said two assessment years, the assessee was a non-resident in India. In the accounting period relevant to the assessment years 1968-69 and 1970-71, the assessee was a resident but not ordinarily resident in India. In respect of the accounting period relevant to the assessment year 1968-69, the wife and the minor sons of the assessee earned from the said firm interest amounting to Rs. 12,410 and in the accounting period relevant to the assessment year 1970-71, the wife and the minor son of the assessee earned interest amounting to Rs. 7,077 on deposits made by them in Barclay's Bank, Kano. All this income was also assessed in the hands of the assessee. It is common ground that the assessee was not taxed on his own share of income from the said firm in Nigeria. However, the Income-tax Officer concerned invoked the provisions of section 64(1)(iii) and (iv) of the Income-tax Act, 1961, and included the aforesaid incomes earned by the wife and the minor sons in the total income of the assessee for the purpose of taxation. On appeals filed by the assessee, the Appellate Assistant Commissioner took the view that section 64 and section 5 of the said Act have to be read harmoniously and in that case, the interest income and the share of profit earned by the wife and minor sons as set out earlier could not be included in the total income of the assessee for the purpose of taxation. The Revenue preferred appeals to the Income-tax Appellate Tribunal. The Tribunal upheld the views taken by the Appellate Assistant Commissioner in favour of the assessee. It is from this decision of the Tribunal that the aforesaid question has been referred to us. We may point out that it is common ground that the assessee had other income in respect of which he was liable to be taxed under the Income-tax Act in all the aforesaid assessment years.

Before considering the submissions of the learned counsel, it would be useful to take note of the relevant provisions of the Income-tax Act, 1961. Sub-section (1) of section 64 of the said Act, as it stood at the relevant time, provided for the inclusion of certain incomes in the total income of the assessee. Relevant provisions of sub-section (1) of section 64 read as follows;

"64. (1) 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 a partner ;

(iii) subject to the provisions of clause (i) of section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart;

(iv) subject to the provisions of clause (i) of section 27, to a minor child, not being a married daughter of such individual, from assets transferred directly or indirectly to the minor child by such individual otherwise than for adequate consideration; ........"

Section 5 sets out the scope of total income. The provisions of section 5 read as follows:

" 5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation I.-Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance-sheet prepared in India.

Explanation 2.-For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India."

The Explanations to this section are not relevant for our purpose. Under section 4, the charge of income-tax is in respect of the total income of an assessee in the previous year or accounting period relevant to the assessment year.

The submission of Mr. Jetley, learned counsel for the Commissioner, is that in view of the provisions of sub-section (1) of section 64 of the Income-tax Act, 1961, to which we have already referred, the income of the wife and the minor sons of the assessee from their share of income in the said firm and the interest earned by them as set out earlier was liable to be included in the total income of the assessee. It was submitted by him that the provisions of section 5 of the said Act have to be read subject to the provisions of section 64 because of the expression " subject to " occurring in the opening part of sub-sections (1) and (2) of section 5. It was contended by him that although the assessee might not have been liable to pay any tax on his share of income in the said firm which was carrying on business in Nigeria and not controlled from India, the income earned by his wife and minor sons from the said firm was liable to be included in his total income which was taxable in India. We find it difficult to accept these submissions. The proviso to clause (c) of sub-section (1) of section 5 provides that in the case of a person not ordinarily resident in India, the income which accrues or arises to him outside India shall not be included in his total income, unless it is derived from a business controlled in or profession set up in India. Similarly, the plain language of sub-section (2) indicates that the total income of a non-resident includes only the income received or deemed to be received by him in India or income accruing or arising or deemed to accrue or arise to him in India during the relevant accounting year. It appears to us that the expression " subject to " used in the opening portion of both the sub-sections (1) and (2) of section 5 has to be read keeping in mind that section 5 is intended to explain the scope of total income. Therefore, what the use of the said expression shows is that in considering what is total income under section 5, one has to exclude such income as is excluded from the scope of total income by reason of any other provision of the Income-tax Act and not that the other provisions of the Income-tax Act override the provisions of section 5 as suggested by Mr. Jetley. If we were to give the provisions of section 5, the interpretation sought to be placed on them by Mr. Jetley, the result would be that in the case, for example, of a non-resident assessee, having some taxable income in India, even the income earned by his wife and minor sons who are not resident in India from a partnership business carried on abroad and not controlled from India in which the assessee is a partner would be liable to be included in the total income of the assessee and liable to be taxed in India. We find it difficult to believe that the Legislature had any such intention in mind in enacting the provisions of section 5 and section 64. Accepting the submission of Mr. Jetley, in our view, would amount to straining the plain language of section 5 to bring about an illogical and unjust result and there is no warrant for us to do so. It was submitted by Mr. Jetley that if we interpret the provisions of section 5, as we have done above, the result would be that even if an assessee is ordinarily resident in India, the income earned by his wife and minor sons from a partnership carried on abroad in which the assessee is a partner would not be included in his total income. We totally fail to see how such a result would be brought about by the construction we have put on section 5. If the assessee is ordinarily resident in India, his total income would include even the income which is earned by him abroad and, in such a case, the provisions of section 64 would come into full play and the respective shares of profit coming to the wife and minor sons of the assessee in a firm in which the assessee is a partner would certainly be included in his total income. In fact, Mr. Jetley was unable to explain how such income would not be included in the total income of an assessee ordinarily resident in India on the construction we have put on section 5. We may point out that the construction put by us on the provisions of section 5 and section 64 is in accord with the language of these sections and also appears to be a reasonable construction because, generally speaking, the object of clauses (i) to (iv) of sub-section (1) of section 64 seems to be to treat the incomes covered therein as if they were the income of the assessee himself and that appears to be the intention of the Legislature in enacting the said provisions.

In the result, the question referred to us is answered in the affirmative and in favour of the assessee. We may make it clear that although the references are answered as above, it is for the reasons given : by us in our judgment and not because of the reasons given by the Tribunal. The Commissioner to pay the costs of the references in one set.

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