Bombay High Court
Commissioner Of Income-Tax vs Modu Timblo (Individual) on 22 April, 1993
Equivalent citations: [1994]206ITR647(BOM)
JUDGMENT DR. B.P. Saraf, J.
1. This is a consolidated reference under section 256(1) of the Income-tax Act, 1961, made by the Income-tax Appellate Tribunal, ("the Tribunal") on eight reference applications, four by the Department and four by the assessee, as they involve common facts and questions of law and arise out of a consolidated order of the Tribunal. The questions of law referred by the Tribunal are as follows :
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in holding that the income from business, share income from partnership firms and interest earned on bank accounts have to be assessed in the hands of the 'body of individuals' consisting of Mr. and Mrs. Modu Timblo ?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in holding that the dividend income received by the communion of interest of husband and wife marred under the Portuguese Civil Code is liable for assessments in equal shares in the hands of each of the consorts without taxing it in the hands of the body of individuals ?
(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in holding that the entire managing director's remuneration and perquisites have to be assessed in the hands of Mr. Modu Timblo, individual, and not one-half of the same ?"
2. This reference relates to the assessment years 1973-74 and 1974-75. For these two years, the assessments were made by the Income-tax Officer on the "body of individuals" consisting of Mr. Modu Timblo and his wife, Mrs. Sushilabai M. Timblo, and also on Mr. Modu Timblo as "individual". There were six appeals before the Tribunal for these two years - two by the Income-tax Officer against the Appellate Assistant Commissioner's orders in the case of Mr. Modu Timblo, individual, and out of the other four appeals, two were by Mr. Modu Timblo, individual, in respect of his individual assessments, and two in respect of the assessments made on the body of individuals consisting of Mr. Modu Timblo and his wife. These appeals were disposed of by the Tribunal by a consolidated order. Against the above consolidated order of the Tribunal in the above appeals, there were four reference applications by the Commissioner, two each by Modu Timblo, individual, and Modu Timblo, representing the body of individuals. The reference applications were filed by the Commissioner in respect of the Tribunal's order in the case of the body of individuals and in the case of Modu Timblo, individual. On all these applications of the Commissioner as well as the assessee, this consolidated reference has been made by the Tribunal.
3. In order to appreciate the questions of law referred to us, it is necessary to set out the relevant facts of the case which have given rise to the two sets of assessments, one on Modu Timblo, individual, and another on the body of individuals ("B.O. I.") comprising Modu Timblo and his wife. Mr. Modu Timblo and his wife, Sushilabai M. Timblo, were Portuguese citizens before the liberation of Goa and were married according to the custom of the realm. They were governed by the Portuguese Civil Code enacted in 1867 which was amended in 1930. During the accounting periods relevant to the assessment years 1973-74 and 1974-75, Mr. and Mrs. Modu Timblo (hereinafter called the "communion" for the sake of convenience), derived income from business run under the name and style of Messrs. Margao Maritime as well as income by way of share in the profits of two partnership firms, viz., Messrs. Auto Universal, Margao, and Messrs. Nav Gomant Prakashan, Margao, and also derived income from interest from banks, dividend on shares and income from letting of property to one Gurudas Timblo. So far as these sources of income were concerned, it was common ground that the income from these sources were of Mr. and Mrs. Modu Timblo in which each had an equal share. Apart from income from the above sources, Mr. Modu Timblo also earned remuneration as well as perquisites from a private limited company as its managing director.
4. For the assessment years 1973-74 and 1974-75, the Income-tax Officer made two assessments for each year. One assessment was made on the communion which was treated as a "body of individuals" as defined in section 2(31) of the Income-tax Act, 1961. In the assessment on the body of individuals for the assessment years 1973-74 and 1974-75, income from the following sources was included :
(i) Income from business in the name of Messrs. Margao Maritime;
(ii) Share of profit from Messrs. Auto Universal and Messrs. Nav Gomant Prakashan;
(iii) Interest from banks;
(iv) Dividends on shares;
(v) Rent from Gurudas Timblo; and
(vi) Perquisites from a private limited company.
5. Two assessments were also made on Mr. Modu Timblo as an individual for the above two years and in these assessments, in addition to remuneration from the private limited company, the Income-tax Officer included, as a protective measure, income which was computed in the assessment of the body of individuals as its income.
6. The assessee preferred appeals to the Appellate Assistant Commissioner against both these sets of assessments. It was contended by the assessee that as the husband and wife forming the communion have equal vested interest both in the communion property as well as income arising therefrom, no assessment ought to have been made on the communion in the status of body of individuals and 50 per cent. of the income of the communion ought to have been assessed in the hands of Mr. Modu Timblo and the remaining 50 per cent. in the hands of his wife, Mrs. Sushilabai Timblo, in their individual status. Apart from this contention, it was also submitted that the remuneration earned by Mr. Modu Timblo from the private limited company was also the income of the communion and, therefore, 50 per cent. of that remuneration only ought to have been included in the assessment of Mr. Modu Timblo.
7. The Appellate Assistant Commissioner did not accept the contention that the communion could not be assessed in the status of "body of individuals" in respect of the income from the communion property. With regard to the remuneration from the private limited company, the Appellate Assistant Commissioner held that the remuneration was to be assessed fully in the individual assessment of Mr. Modu Timblo. In the above circumstances, the Appellate Assistant Commissioner dismissed the appeals filed by the body of the individuals and partly allowed the appeals filed by Modu Timblo in his status as an individual - the relief being that the income from the communion properties was excluded from the individual assessments of Modu Timblo.
8. Both the Revenue as well as the assessee, viz., body of individuals consisting of Mr. Modu Timblo and his wife and Mr. Modu Timblo as individual went in appeal to the Income-tax Appellate Tribunal ("the Tribunal") against the orders of the Appellate Assistant Commissioner. All these appeals were disposed of by the Tribunal by its consolidated order dated March 31, 1977. The main contention on behalf of the communion before the Tribunal was that there could be no assessment in the status of body of individuals while the main contention of Mr. Modu Timblo as individual was that only 50 per cent. of the remuneration received by him from the limited company ought to have been assessed in his hands as an individual and the remaining 50 per cent. should be assessed in the hands of his wife. The Revenue, on the other hand, in its appeals, contended that the Appellate Assistant Commissioner erred in excluding from the total income of the individual the income from business and other sources arising from the communion property.
9. The Tribunal considered the aforesaid rival submissions of the assessee as well as the Revenue in the light of the decision of this court in CIT v. Purushotam Gangadhar Bhende [1977] 106 ITR 932 and held that the High Court in the above case was mainly concerned with the legal position of the communion with regard to its "income from property" and in that context on a detailed examination of the various articles of the Portuguese Civil Code, it was held that section 26 of the Income-tax Act, 1961, applied to the communion in regard to its income from house property. The Tribunal also noticed that the High Court did not examine the legal position whether in regard to communion's income falling under heads other than "income from house property", the status of the communion should be body of individuals or not. According to the Tribunal, the High Court in the above case had clearly opined that the communion of the husband and wife was not akin to a Hindu undivided family under the Mitakshara system of Hindu law nor to a "firm" as defined in the Indian Partnership Act and that it was akin to a tenancy-in-common or to the English coparcenary having a unit of title, interest and possession. The Tribunal also considered the decision of the Supreme Court in CIT v. Indira Balkrishna [1960] 39 ITR 546, as well as the decision of the Andhra Pradesh High Court in Deccan Wine and General Stores v. CIT [1977] 106 ITR 111 and of the Gujarat High Court in CIT v. Harivadan Tribhovandas [1977] 106 ITR 494 and on an elaborate discussion of the principles laid down in the above judgments found that in order to bring the communion of husband and wife within the definition of "body of individuals" under the Income-tax Act, the following two tests should be satisfied :
(1) There should be a combination of individuals who have a unity of interest; and (2) One or more of the members of such a combination must carry on some activity with the object of earning income or one or more member must produce or help to produce income for the benefit of all.
10. The Tribunal also observed that from the above decisions it was clear that : (i) a combination of individuals who merely received income jointly without anything further as in the case of co-heirs inheriting shares or securities will not be a body of individuals, and (ii) "body of individuals" and "association of persons" do not conceive an identical person. In the light of the above observation based on the decision of the Supreme Court and the various High Courts, the Tribunal held that in order that the communion of the husband and wife constitute a body of individuals for the purposes of the Income-tax Act, it would be necessary that the communion of husband and wife marred under the Portuguese Civil Code satisfies the two essential tests mentioned above with reference to each head of income enumerated in section 14 in respect of which it is sought to be assessed in what status. The Tribunal then proceeded to examine how far these tests were satisfied in respect of the different sources of income concerned. The Tribunal summed up its findings as follows :
"(A) Salaries : This would be assessed in the hands of the individual earning the salary;
(B) Interest on securities : This will have to be assessed equally, but separately, in the hands of the husband and the wife;
(C) Income from house property : This has to be assessed separately in equal shares in the hands of the husband and the wife under section 26 of the Act as held in Bhende's case [1977] 106 ITR 932 (Bom);
(D) (i) Income from business : Income from any business carried on by the communion or on its behalf will be the income of the body of individuals and will have to be assessed in that status.
(ii) Income from profession : Income from profession will have to be fully assessed in the hands of the individual who earns the professional income as in the case of salary. It noted, however, that there might be exceptions when there is a combined effort in the nature of business or profession.
(E) Capital gains : The assessability of capital gains in the hands of the body of individuals or the individuals constituting the communion will depend upon the facts of each case;
(F) Income from other sources : Different types of income under this head may have to be assessed differently on the facts of each case."
11. In the light of the above conclusions, the Tribunal held that in the case of communion of the husband and wife under the Portuguese Civil Code, by and large income from business and some of the sources such as hiring of machinery, plant, etc., falling under the head "Income from other sources" would be that of the body of individuals, income falling under the other heads, "Interest on securities", "Profits and gains of profession", "Capital gains" and from other sources such as "Dividends", "Interest on deposits", etc., will be joint income of the two spouses and will have to be assessed in their hands in equal shares. The Tribunal did not agree with the contention raised on behalf of the assessee that even if the income was treated as accruing or arising to the communion as "a body of individuals", in view of the rights of the husband and wife to the property and income there will be a diversion of income by overriding title. In that view of the matter, the Tribunal held that income from business in the name of Messrs. Marmugao Maritime and the income from the two partnership firms, namely, Messrs. Auto Universal and Messrs. Nav Gomant Prakashan, should be assessed in the status of "body of individuals". Similarly, interest from banks on current accounts and saving bank accounts maintained in the course of the business carried on by the communion should be assessed as income of the body of individuals. Income from dividends was, however, held to be assessable equally in the hands of the two spouses in their individual assessments. With regard to the income from property let out to Gurudas Timblo, which was derived from letting out of godowns and office premises, the Tribunal held that it was income from house property and the provisions of section 26 will apply as held by this court in CIT v. Purushotam Gangadhar Bhende [1977] 106 ITR 932. It also held that the remuneration from the private limited company, viz., Sociedade De Fomento Industrial Private Ltd., including the perquisite of Rs. 3,000 earned by Mr. Modu Timblo, should be assessed fully in the hands of Mr. Modu Timblo, individually.
12. As stated above, both the assessee in his status as an individual as well as body of individuals and the Revenue applied for reference under section 256(1) of the Act. Accordingly, the Tribunal has made this reference.
13. We have heard learned counsel for both the parties at length.
14. The contentions of Shri Dastur, learned counsel for the assessee, can be summed up as under :
(i) The Portuguese Civil and Commercial Codes do not create a body of individuals comprising husband and wife, in whose hands any income may be assessed because the essential requirements to constitute a body of individuals are absent in the case of a communion of husband and wife. Reliance was placed in support of this submission on the decisions of this court in CIT v. Purushotam Gangadhar Bhende [1977] 106 ITR 932, CIT v. Y. S. Desale [1982] 137 ITR 117, CGT v. Aleixo P. Velho [1983] 143 ITR 372 and of the Gujarat High Court in CIT v. Harivadan Tribhovandas [1977] 106 ITR 494. The fact that the management of the property or the business, after the marriage, is in the hands of one of the parties, i.e., the husband or the wife does not in any way affect the above position. (ii) This court having held in Purushotam Gangadhar Bhende's case [1977] 106 ITR 932 in Aleixo P. Velho's case [1983] 143 ITR 372 that the ownership of all property existing and future vested in both the husband and wife in half shares and having directed the assessment of the income from house property in equal shares in the individual assessments of husband and wife, there can be no body of individuals of husband and wife. (iii) Though the decision of this court in CIT v. Purushotam Gangadhar Bhende [1977] 106 ITR 932, was rendered in a case where the dispute related to assessment of income from "house property" which was decided with reference to section 26 of the Act, the ratio thereof will apply to income falling under all heads (even though section 26 did not apply thereto). Reliance was placed in support of this contention on a decision of this court in Addl. CIT v. Valentino F. Pinto, Mapuca [1984] 150 ITR 408. (iv) That on a correct reading of the rights of the husband and wife under the Portuguese Civil Code and the decisions of this court, even the salary income earned by any of the members of the communion, i.e., husband or wife, would accrue or arise in equal shares to each of them inasmuch as salary is also property. (v) Even assuming that the entire amount of income from any source arises either to the husband or the wife, by virtue of the Code a half share of such income will get diverted by overriding title or a charge by operation of law to the other spouse and, as such, only half of the income can be assessed in the hands of the husband or wife to whom it accrued.
The submission of Dr. Balasubramaniam and Mr. G. S. Jetly, learned counsel for the Revenue, on the other hand, is that on a proper reading of the various provisions of the Portuguese Civil Code which have been set out and discussed at length in the judgment of this court in CIT v. Purushotam Gangadhar Bhende [1977] 106 ITR 932 and the binding decision of this court in that case, it is clear that the issue for determination before the court was whether in the case of a husband and wife governed by the Portuguese Civil Code and married according to the custom of Goa, each of them can be said to own shares in house property which are "definite and ascertainable" within the meaning of section 26 of the Act. The court, on going through the various clauses of the Portuguese Civil Code, came to the conclusion that each of them had a definite and ascertainable share in the communion property as well as in the income and in that view of the matter held that section 26 applied to the income from house property derived by the communion. According to learned counsel, in the above case, the undisputed position was that the communion of husband and wife marred under the Portuguese law was an association of persons because as otherwise there was no question of application of section 26 of the Act nor there was any necessity to go into the elaborate discussion, which the court had done in that case, to find out whether the requirements of section 26 were fulfilled or not in the case of communion of husband and wife. The submission of counsel, in other words, is that the decision CIT v. Purushotam Gangadhar Bhende [1977] 106 ITR 932 (Bom) presupposes that the communion is an association of persons and it is on that foundation that the court proceeded to examine the applicability of section 26 of the Act. The further submission of counsel for the Revenue is that to decide whether a group of persons can be termed as an "association of persons" or "body of individuals" within the meaning of section 2(31) of the Act, it is necessary to know the nature of the activity undertaken by them. It will vary from the case to case. Counsel for the Revenue also pointed out that it is not proper to equate a body of individuals with an association of persons because doing so will amount of defeating the very purpose of specifically incorporating the expression "body of individuals" in the list of persons who are taxable entities in addition to "association of persons" which was already in the Indian Income-tax Act, 1922 ("the 1922 Act"). Learned counsel referred to the decision of the Supreme Court in CIT v. Indira Balkrishna [1960] 39 ITR 546 and submitted that in the said judgment the court had interpreted the word "association" and had set out some conditions which should be fulfilled in order to bring a group of person within the meaning of "association of persons". To meet this situation, in the definition of "person" in section 2(31) of the 1961 Act, the word "body of individuals" was specifically included. It was done only to bring in a group of persons within that category of assessees which would not have otherwise fallen within its ambit because of the restricted meaning given to the expression "association of persons".
15. Learned counsel also submitted that the question of diversion of income from the husband to the wife or vice versa does not arise in this case.
16. As regards the decision of this court in Addl. CIT v. Valentino F. Pinto, Mapuca [1984] 150 ITR 408, the submission of learned counsel for the Revenue is that the said decision has been given per incuriam.
17. We have carefully considered the rival submissions of learned counsel for the parties. We have also perused the relevant provisions of the Portuguese Civil Code. We do not propose to deal with the various provisions of the said Code at length because all those have been elaborately discussed by this court in Purushotam Gangadhar Bhende's case [1977] 106 ITR 932 and Aleixo P. Velho's case [1983] 143 ITR 372 (Bom). The legal propositions that emerge from the various provisions of the Portuguese Civil code as well as article 10 of the Commercial Code have been summed up in Purushotam Gangadhar Bhende's case [1977] 106 ITR 932 (Bom) thus (at page 940) :
"(i) During the subsistence of a marriage celebrated as per the custom of Goa, the ownership and possession of 'the common estate', immovable as well as movable, vests in both the husband as well as the wife. This is laid down in express terms in article 1117. Articles 1118 and 1119 as well as 1766 are also consistent with that legal position;
(ii) Proposition No. 1 applies to the corpus as well as the income of all communion property, immovable as well as movable. The unique paragraph (proviso) to article 1109 lays down that even the income of property excluded from the communion is communion property. A fortiori the income from the communion property itself must be communion property;
(iii) Under articles 1117 and 1189, the husband has only a right of management, but even that right is not an absolute right so as to amount to 'ownership' of the income, in view of the provisions of articles 1118, 1119, 1191 and 1219. Moreover, under the very articles 1117 and 1189, even the wife can be in management in certain contingencies, her right being similarly fettered under the provisions of article 1193;
(iv) In the corpus as well as the income of communion property, immovable as well as movable, the husband and the wife each have, during the subsistence of a marriage celebrated as per the custom of Goa, a fixed and certain half share which can be ascertained on the termination of the communion by divorce, separation or death (articles 1121 to 1124, 1203, 1204, 1210, 1216, 1220 and 1226). What is most important in this connection is that it is an admitted position that on the death of one of the spouses, communion property does not devolve by survivorship, but the half share of the deceased spouse goes by succession to his or her own heirs or legatees by virtue of articles 1122 and 1123. There is a consistent reference to the half share of each of the consorts throughout the different articles dealing with various situations (vide articles 1112 to 1114 of the Portuguese Civil Code, and article 10 of the Commercial Code dealing with the incidence of debts, and Portuguese Civil Code article 1118, dealing with the disposal of the movable property as well as articles 1120, 1123, 1220, 1463 and 1471)."
18. The above legal propositions have been reiterated by this court in Aleixo P. Velho's case [1983] 143 ITR 372 (Bom).
19. In Purushotam Gangadhar Bhende's case [1977] 106 ITR 932 (Bom), the controversy related to assessment of income from house property. The assessee, a Portuguese citizen, before the liberation of Goa, governed by the Portuguese Civil Code was married as per the custom of Goa and under the relevant provisions of the Portuguese Civil Code, a house property which yielded an income of Rs. 3,180 in the previous year relevant to the assessment year 1968-69, became the property of the communion of the husband and wife. The Income-tax Officer assessed the income from the property as that of a "body of individuals". The appellate Assistant Commissioner held that in view of the special provision contained in section 26 of the Act, respective shares of the husband and wife should be taxed in their individual hands separately and reversed the order of the Income-tax Officer. The Tribunal confirmed the order of the appellate Assistant Commissioner. The Revenue came to the High Court by way of reference. It was contended for the Revenue that so long as the communion lasts, the husband and wife have no definite and ascertainable share in the communion property. It was in this context that this court examined the various provisions of the Portuguese Civil Code and article 10 of the Commercial Code and held that under the above provisions, the husband and wife each have, during the subsistence of a marriage celebrated as per the custom of Goa, a certain and fixed half share in the corpus as well as the income of the communion property of the husband and wife, immovable as well as movable, which can be determined only on the termination of the communion by divorce, separation or death. In that view of the matter, it was held that section 26 of the Income-tax Act was attracted and the respective half shares of the husband and wife in the income from the house property, which was the property of the communion of the husband and wife married according to the custom Goa should be assessed separately in the hands of each of them, and not in the hands of "the body of individuals", i.e., the communion of husband and wife, for the relevant assessment year. This decision is thus an authority for the following propositions : (i) the communion of husband and wife married according to the custom of Goa is a "body of individuals"; (ii) the shares of both the members of this body of individuals in the corpus and the income of the communion property are definite and ascertainable; and (iii) that being so, section 26 of the Income-tax Act, 1961, will apply to the income of such association of persons or body of individuals from house property which provides that in respect of income from house property which provides that in respect of income from house property, such persons should not be assessed as an association of persons but the share of each such person in the income from the property should be included in his total income.
20. The same is the ratio of the decision of this court in CGT v. Aleixo P. Velho [1983] 143 ITR 372. In this case also, a gift of movable and immovable properties was made by an individual and his wife married under the portuguese Civil Code. It was held that when the husband and wife, who had been assessed as a body of individuals, made the gifts, each of them gifted only his and her respective half share in the properties and hence no assessment could be made on them on the footing of their having made the gift as a body of individuals. This decision given in the context of the Gift-tax Act does not in any way affect the foundation of the judgment that the communion is a body of individuals.
21. Before we proceed to decide the status of the assessee vis-a-vis the income assessed under each head of income, it may be expedient to mention the decision of the Supreme Court in CIT v. Indira Balkrishna [1960] 39 ITR 546. This was a case under the Indian Income-tax Act, 1922, where there was no taxable entity like "a body of individuals". It was only "an association of persons". Interpreting the expression "association of persons" as used in section 3 of the Income-tax Act, it was held by the Supreme Court that the word "associate" means "to join in common purpose, or to join in an action". Therefore, "association of persons" means an association in which two or more persons join in common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. Thus the above decision was based on the meaning of the word "association".
22. The expression "person" has now been defined in section 2(31) of the Income-tax Act, 1961, which included "an association of persons or a body of individuals, whether incorporated or not". The Legislature had definitely some purpose in mind while specifically including a body of individuals in the category of persons along with "association of persons". It will not be proper to say that "body of individuals" must be given the same meaning attributed to "association of persons" by the Supreme Court in Indira Balkrishna's case [1960] 39 ITR 546. Doing so will render the entire exercise of defining the expression and incorporating specifically "body of individuals" within the ambit of particular category of persons redundant.
23. The expression "body of individuals" must be given a definite meaning of its own "Association of persons" and "body of individuals" convey two different combinations of persons and it will not be proper to try to apply the principle of ejusdem generis to give the same restricted meaning to the newly introduced expression "body of individuals" as had been given by the Supreme Court to "the association of persons" on interpretation of the word "association". The fact that both the expressions are placed under a common item, does not justify such restrictive interpretation. The expression "body of individuals" must receive a wider interpretation than "association of persons". As observed by Chinnappa Reddy J. (as his Lordship then was) in Deccan Wine and General Stores v. CIT , the expression "body of individuals" should receive a wide interpretation, perhaps not wide enough to include combination of individuals who merely receive income jointly without anything further as in the case of co-heirs inheriting shares or securities, but certainly wide enough to include a combination of individuals who have a unity of interest but who are not actuated by a common design and one or more of whose members produce or help to produce income for the benefit of all. If we apply these tests to the communion of husband and wife married under the Portuguese law in respect of income derived from business or such other activities which is managed by one of the members, it is difficult to say that such communion will not be a body of individuals, because the essential requirements of unity of interest and one or more member producing or helping to produce income for the benefit of both are present. What is submitted by counsel for the assessee in this case is that marriage was not with the intention of carrying on business or earning income. In other words, the combination was actuated by a common design to carry on business or to earn income. That, in our view, is not necessary in the case of a body of individuals. In the judgment of this court in Aleixo P. Velho's case [1983] 143 ITR 372, the decision of the Supreme Court in CGT v. R. Valsala Amma [1971] 82 ITR 828, which related to a gift by the two ladies who had received the property which was the subject-matter of gift as tenants-in-common was referred to. It was observed by this court that in the case before the Supreme Court, the subject-matter of the gift was property, i.e., building and not businesses and the considerations which determine whether a gift is made by a body of individuals are obviously different from the considerations which determine whether income had accrued or could be deemed to have accrued to a body of individuals.
24. In view of the foregoing discussion, we are of the clear opinion that the communion of husband and wife married under the custom of Goa and governed by the Portuguese Civil Code constitutes "a body of individuals" for the purposes of the Income-tax Act and it will have to be decided in respect of each head of income whether the income has accrued or arisen to the body of individuals as such or to its members individually. For that purpose, we will have to deal with each head of income. Before doing so we may refer to rival submissions of both the parties based on the decision of this court in Addl. CIT v. Valentino F. Pinto, Mapuca [1984] 150 ITR 408 and observations made therein that the ratio of the decision of this court in Purushotam Gangadhar Bhende's case [1977] 106 ITR 932 will apply to "all income". We have carefully considered the said decision. For reasons to be discussed a little later, we are of the opinion that so far as it relates to income from all sources other that business, these observations are only causal observations which do not form a binding precedent. So far as the decision pertains to "business income", it is a decision per incuriam and, as such, it cannot be a binding precedent.
25. Learned counsel for the assessee referred to the decision of this court in CIT v. Y. S. Desale [1982] 137 ITR 117 and submitted that this court has taken a view that in order to hold a combination of persons a body of individuals, it must satisfy more or less the same conditions laid down for "an association of persons" in Indira Balkrishna's case [1960] 39 ITR 564 (SC). We have considered this submission. We do not find that the above judgment is an authority for such an extreme proposition. This court, in the above case, had made it clear that it is not possible by its very nature to lay down any exhaustive definitions of "a body of individuals". It is in that context that it was observed that the "body of individuals" contemplated by the definition of "person" in section 2(31) must be a body which has the object of undertaking an income-producing activity. Unless that element is present, however wide meaning and scope of "a body by individuals" may be, as compared with the limited concept of "an association of persons", it will be difficult to treat a given number of persons as "a body of individuals" as contemplated by the definition of "person" in section 2(31) of the Act. The above observations thus make it clear that "a body of individuals" is different from "an association of persons" which is limited in its ambit and scope. If we read the above observations of this court with observations of Chinnappa Reddy J. in Deccan Wine and General Stores' case , the position becomes still more clear that even if a "body of individuals" has some characteristics common with "an association of persons", it cannot be the same thing as or a mere species of an "association of persons" which is better described as a "body of individuals". We find it difficult to give too narrow and restricted an interpretation to the expression "body of individuals". The legal position in this regard has been very aptly summed up Chinnappa Reddy J. in the following words (at page 114) :
"Thus, a 'body of individuals' is brought in an placed alongside 'an association of persons'. The juxtaposition of the two expressions does not suggest that the expression 'body of individuals' should be interpreted ejusdem generis with the expression 'association of persons'."
26. Naturally, the interpretation should not be so as to destroy the separate identity of the expression "body of individuals". The expression must have a distinct meaning of its own; otherwise Parliament would not have introduced it. It may have some common characteristics with "an association of persons" but it cannot be the same thing as an association of persons or, as contended by the learned counsel, a mere species of "association of persons" which is better described as "a body of individuals".
27. The issue before this court in Addl. CIT v. Valentino F. Pinto [1984] 150 ITR 408 related to the assessment of income from business accruing to a communion of husband and wife governed by the Portuguese Civil Code. The question was whether it was to be assessed in the hands of the communion or separately in the hands of the husband and wife. This court referred to its earlier decision in Purushotam Gangadhar Bhende's case [1977] 106 ITR 932, and observed that, in the said judgment, although the income considered and it was income from house property, the provisions of the Portuguese Civil Code as well as article 1192 of the Commercial Code were considered and it was observed that the respective half shares of the husband and wife in the income from the house property, which the property of the communion of the husband and wife married according to the custom of Goa, should be assessed separately in equal shares in the hands of each of them, and not in the hands of "the body of individuals" of the communion of husband and wife. This ratio, it was observed, "would seem to apply to all types of income and cannot be restricted to house property". In the light of this observation, the answer to the question before the court in that case was given in favour of the assessee. We have carefully gone through the above decision. We have already held that this decision, so far as it pertains to assessability of business income accruing to a communion of husband and wife governed by the Portuguese law, is per incuriam because the court, while applying the ratio of the earlier decision in Purushotam Gangadhar Bhende's case [1977] 106 ITR 932 (Bom), did not take note of the fact that the decision in that case in regard to the house property income had been arrived at in view of the specific provision in regard to computation of income from house property owned by co-owners contained in section 26 of the Act which clearly provides that where any house property is owned by two or more persons and their respective shares are definite and ascertainable, such persons shall not in respect of such property be assessed as an association of persons, but the share of each such person in the income from the property as computed in accordance with sections 22 to 25 shall be included in his total income. This section applies to "income from property" of an association of persons which includes "a body of individuals" also by virtue of section 2(31) of the Act. It is on account of this provision that such income is not assessed in the hands of the association of persons but is assessed in the hands of the co-owners if their shares are definite and ascertainable. Thus, for the application of that section, the condition precedent is that the shares of the co-owners are "definite and ascertainable". The question that arose before this court in Purushotam Gangadhar Bhende's case [1977] 106 ITR 932 was whether section 26 would apply to income derived from a communion of husband and wife governed by the Portuguese law. It, therefore, became necessary for the court to find out whether the share of each member of the communion was definite and ascertainable. It was for that purpose that this court went into all the relevant chapters and clauses of the Portuguese Civil Code which governs the rights of the parties to a marriage performed under the Portuguese law and on perusal of the same held that section 26 applied to house property income derived by the communion of husband the wife governed by the Portuguese law and decided the controversy before it accordingly. The issue in that case was confined to the rights of the members of the communion of husband and wife governed by the Portuguese law and the applicability of section 26 to income from house property derived by such communion. The conclusion arrived at by this court in that case was the shares of both the husband and wife in communion property were equal. That ratio can be applied to other sources only if similar provision is available in the Income-tax Act in regard to the income falling under other heads also. There is no dispute at the Bar that no identical provision is there in the Act in regard to computation of income falling under any other head of income. That being so, it is difficult to say that the ratio of the decision in Purushotam Gangadhar Bhende's case [1977] 106 ITR 932 (Bom) can be applied to income from business. This aspect of the matter, it appears, was not brought to the notice of the court which is evident from the peculiar situation in which the court was placed while delivering the above decision which has been set out at the outset in the judgment itself. When that reference was called out for hearing, it was noticed by the court that no service had been effected on the assessee by the Revenue at whose instance the reference had been made. The court expressed its displeasure over the way the reference had been handled by the Revenue and did not feel inclined to postpone the hearing any further to enable a specific notice being given to the respondent because the matter seemed to be covered, though not specifically, but in principle by the decisions of this court. This is clear from the following observations of the court (at page 409 of 150 ITR) :
"We find it unnecessary to dispose of the reference on the ground that no proper service has been effected. We also find it unnecessary to postpone the hearing any further to enable a specific notice being given to the assessees. The matter has been kept back on a number of occasions but nothing has been done by the Central Government advocate. This is also because the questions referred to us seem to be covered, though not specifically, but in principle, by the decisions of our High Court in CIT v. Purushotam Gangadhar Bhende [1977] 106 ITR 932, which decision was subsequently applied in another case, namely, CGT v. Aleixo P. Velho [1983] 143 ITR 372."
28. However, while concluding, the court used somewhat guarded language when it observed (at page 410) : "This ratio would seem to apply to all types of income and cannot be restricted to house property. If that be so, the two questions referred to us can be answered without further elaborate discussion, either factual or legal." The circumstances under which the court had to decide this case are evident from the factual situation set out above. It is evident that the court's attention was not drawn to the distinction in the matter of treatment of income under the head "House property" and income under other heads which had been created by the Legislature it self by virtue of specific provision contained in section 26 of the Act. It was not brought to the notice of this court that the decision of this court in Purushotam Gangadhar Bhende's case [1977] 106 ITR 932 had been rendered on application of section 26 of the Act which applied only to house property income and to no other income. Under the circumstances, the same ratio cannot apply to income falling under heads other than "income from house property". The said decision, therefore, is a decision per incuriam, so far as it pertains to income from business which was the subject-matter of controversy before it because, evidently, in that case this court acted in ignorance of the relevant provisions of the Act. The general observations therein are casual observations so far as they relate to income from other heads because the treatment of income falling under any other head was not the subject-matter of consideration before this court in that case. Such broad observations were neither necessary for the decision of that case not justified on the basis of the discussions contained therein.
29. It may also be not be out of place to mention here that the fact that a particular combination of persons has been held to be a body of individuals or association of persons in respect of a particular activity, does not mean that it will be so in respect of all activities of income therefrom. The status may vary from activity to activity. This aspect of the matter has been dealt at length by us an earlier decision in CIT v. Shiv Sagar Estates (AOP) [1993] 201 ITR 953 (Bom), Income-tax Reference No. 231 of 1977 dated 17/18th December, 1992. It is observed thus (at page 961) :
"A person or group of persons may work in more than one capacity. The Income-tax Act clearly recognises dual capacity of a person or a group of persons. In respect of the property in question, these persons were co-owners, in the company they were shareholders, in the partnership firm they were partners. They might also have formed an association of persons to carry on any other activity. All these can go on simultaneously. The very same persons may receive income as co-owners, as shareholders, as partners or as members of an association of persons and their status in respect of a particular income will not affect their status in respect of other incomes."
30. We reiterate and reaffirm the above observations.
31. We may next deal with the submission of learned counsel for the assessee in regard to diversion of income by overriding title in view of the equal share of both the husband and wife in the property and income of the communion by virtue of the provision of the Portuguese Civil Code. On a careful consideration, we find it difficult to accept the submission that it is a case of diversion of income by overriding title. As observed by this court in CIT v. Bombay Oilseeds and Oil Exchange Ltd. [1993] 202 ITR 198 (Bom) (Income-tax Reference No. 238 of 1978 decided on 19th and 20th January, 1993) (at page 206) :
"It is a well-settled legal proposition that an obligation to apply income which has accrued or arisen or has been received amounts merely to the apportionment of the income and not to its diversion. An obligation to use the income in a particular manner does not remove it from the category of income even if such obligation is part of the original contract giving rise to the income. Once income has come to the hands of the assessee, it will be liable to income-tax whatever may be its destination or to whatever use it may be put. There is a clear distinction between an obligation to spend in a particular manner attaching to an income and an obligation attaching to the source of an income. The legal effect in the two circumstances is completely different. In the former, it will be an application of income. In the latter, it is diversion."
32. As observed by the Supreme Court in CIT v. Imperial Chemical Industries (India) (P.) Ltd. [1969] 74 ITR 17 (at page 25) : "the true test for the application of the rule of diversion of income by an overriding title is whether the amount sought to be deducted in truth never reached the assessee as his income".
33. Applying the above test, we are of the clear opinion that the principle of diversion of income by overriding title has no application in the case of communion of husband and wife governed by the Portuguese law. In that view of the matter, for the purpose assessment, it will be necessary to decide in respect of every income whether it has accrued or arisen to the communion as a body of individuals or to both the husband and wife separately in proportion to their shares in the property or to any one of them, as in the case of "salary".
34. Before we proceed to discuss the question of accrual of income with reference to each head of income, it may be expedient to deal with the last argument of learned counsel for the assessee based on the provision of section 80C(2)(g) of the Act in support of his argument that the communion should not be treated as a "body of individuals". Section 80C(2)(g) provides for deduction of amounts paid to effect or keep in force a life insurance policy on the lief of any of the members or the child of any of the members in computing the income of an association of persons of body of individuals consisting, in either case, only of husband and wife governed by the system of community of property in force in the State of Goa. We have perused the above provision and considered the submission of learned counsel for the assessee. We fail to understand how this provision supports the contention of the assessee that the communion of husband and wife governed by the Portuguese law cannot be treated as an association of persons or a body of individuals. On the other hand, in our opinion, this provision clearly visualises an assessee which is an association of persons or a body of individuals consisting in either case, only of husband and wife governed by the system of community of property (referred to in this judgment as "communion") in force in the State of Goa. Section 80C, so far as is relevant, as it stood at the material time, reads :
"80C. Deduction in respect of life insurance premia, contributions to provident fund, etc. - (1) In computing the total income of an assessee, there shall be deducted, in accordance with and subject to the provisions of this section, an amount calculated, with reference to the aggregate of the sums specified in sub-section (2), at the following rates, namely :- ...
(2) The sums referred to in sub-section (1) shall be the following, namely :-
(a) where the assessment is an individual, any sums paid in the previous year by the assessee out of his income chargeable to tax - . . .
(b) where the assessee is a Hindu undivided family, any sums paid in the previous year by the assessee out of its income chargeable to tax, to effect or to keep in force in insurance on the life of any member of the family; . . . . .
(g) where the assessee is an association of persons or a body of individuals consisting only of husband and wife governed by the system of community of property in force in the Union Territories of Dadra and Nagar Haveli and Goa, Daman and Diu -
(i) any sums paid in the previous year by the assessee out of its income chargeable to tax -
(1) to effect or to keep in force an insurance on the life of any member of such association or body or on the life of any child of any of the members of such association or body; or (2) to effect or to keep in force a contract for a deferred annuity on the life of any member of such association or body or any child of any of the members of such association or body :
Provided that such contract does not contain a provision for the exercise by the insured of an option to receive a cash payment in lieu of the payment of the annuity; or (3) as a contribution to any provident fund referred to in sub-clause (iv) of clause (a); or (4) as a contribution for participation by any one member of such association or body in the Unit-linked Insurance Plan. . . ."
35. From a plain reading of the above provision, it is clear that different provisions have been made for deduction depending upon the fact whether the assessee is an individual, a Hindu undivided family or "an association of persons or a body of individuals consisting, in either case, only of husband and wife governed by the system of community of property in force in the State of Goa and the Union Territories of Dadra and Nagar Haveli.
36. It is pertinent to note that the benefit of deduction has not been extended to all associations of persons or bodies of individuals but has been restricted to associations or bodies of individuals consisting, in either case, only of husband and wife governed by the system of community of property in force in the State of Goa, etc. This provision, in our opinion, instead of supporting the contention of the assessee, lends full support to the conclusion arrived at by us that the communion of husband and wife has to be treated as an association of persons or a body of individuals for the purpose of assessment of income from the communion property.
37. In the background of the above discussion, we may refer to some of the provisions of the Act.
38. Section 4 is the charging section. It provides, inter alia, that income-tax shall be charged in respect of the total income of the previous year of every person. "Person" has been defined in section 2(31) to include, inter alia, an individual, a Hindu undivided family, a firm, "an association of persons or a body of individuals, whether incorporated or not". Section 5 of the Act defines the scope of total income with reference to residence in India. In respect of residents who are ordinary residents, it provides that the total income of such person shall include all income from whatever source derived which is received or deemed to be received in India or accrues or arises or is deemed to accrue or arise to him in India or accrues or arises to him outside India. By section 14, income has been classified, for the purpose of charge of income-tax and computation of total income, under the following heads of income :
"A. - Salaries B. - Interest on securities C. - Income from house property D. - Profits and gains of business or profession E. - Capital gains F. - Income from other sources."
39. The question for determination is which income in the instant case has accrued or arisen to the association of persons or body of individuals consisting of husband and wife governed by the Portuguese law in force in Goa, which has accrued or arisen to both the husband and wife individually and which has accrued solely to any one of them.
40. We may take up income from house property first. The income from house property derived by a communion of husband and wife governed by the Portuguese Civil Code will not be assessed in the hands of the communion but in view of section 26 of the Act, the share of each such person in the income of the property shall be assessed in his or her individual hands. This aspect also stands concluded by the decision of this court in Purushotam Gangadhar Bhende's case [1977] 106 ITR 932. We are not concerned in the present case with interest on securities. We, therefore, need not deal with the same.
41. So far as interest from bank accounts, fixed deposits, etc., is concerned, which falls under the last head, viz., "Income from other sources", it may be observed that this is a residuary head and various incomes may fall under it because income of every kind which is not to be excluded from the total income under the Act shall be chargeable to income-tax under this head if it is not chargeable to income-tax under any other head specified in section 14. In the instant case, we are called upon to decide the assessability of income from "interest" and "dividend" which was received from investment of funds which belonged in equal shares to both the husband and wife. There was no question of management or effort in deriving the above income. It is not a case where the income was derived from money-lending business or in the course of dealing in shares where different considerations may apply. In the instant case, we do not find anything to hold that the income from these two sources was derived by the two co-owners as "a body of individuals". The fact that it was received by one of them for and on behalf of both is not determinative. This income therefore, has to be assessed in equal shares separately in the hands of both the husband and wife in the status of individuals. This conclusion of ours gets full support from the decision of the Supreme Court in G. Murugesan and Bros. v. CIT [1973] 88 ITR 432. In this case, the Supreme Court had to decide about the assessability of income from dividend from shares which stood in the joint names of a number of persons. The question was whether the dividend income in such a case could be assessed in the hands of the joint owners in the status of an association of persons. The Supreme Court held that in the case of receiving dividends from shares, Where there is no question of any management, it is difficult to draw an inference that two or more shareholder functioned as an "association of persons" from the mere fact that they jointly owned one or more shares, and jointly received the dividend declared.
42. So far as the "profits and gains of business or profession" are concerned, having held that the communion constituted a body of individuals which is a separate taxable entity under section 4 of the Act read with section 2(31) thereof, in the absence of any special provision to the contrary, we do not find any reason to hold that the income is not assessable in the hands of the "body of individuals". The income from business therefore, will be assessable in the hands of the combination as "a body of individuals" and the same cannot be divided equally among the two members of the communion for the purpose of assessment in their hands separately. While computing the income, deduction shall, however, be available in respect of life insurance premium, etc., paid for effecting insurance on the life of husband or wife or the child by virtue of the special provision contained in section 80C(2)(g) of the Act.
43. So far as the salary income is concerned, it was contended by learned counsel for the assessee that this income is also property and, therefore, belongs equally to the husband and wife no matter who earns the salary. In that view of the matter, according to learned counsel, the income from salary should be divided equally between the husband and wife for the purpose of assessment and assessed accordingly. We have given very careful consideration to the above submission. We, however, find it difficult to accept the same, because such a conclusion will go counter to all know principles of law regarding accrual or arising of income from salary. In this connection, it may be mentioned that salary has been defined in section 15 of the Act. What is chargeable to tax under the head "Salaries" is :
"(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;
(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;
(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year."
44. For the removal of doubts, in the Explanation, it has been declared that where any salary paid in advance is included in the total income of any person for any previous year, it shall not be included again in the total income of the person when the salary becomes due.
45. The above definition clearly goes to show that what is assessed under the head "Salaries" is the salary due to the assessee from an employer or a former employer. In the instant case, the husband was the employee. It was he who was employed. The salary accrued to him and it was payable to him by the employer. The employer, while doing so, was not concerned with the customary laws of his employee. It is impossible to comprehend that the income from salary can be said to arise to a person who is not in employment. The customary law or specific law of Goa determines the rights of the husband and wife in the property and income. It cannot make the wife also an employee where the husband is employed nor, by reference to such law, can it be said that half of the salary due to the husband for the services rendered by him will accrue to the wife. In matters like this, the customary law has no relevance. Situated thus, we are of the clear opinion, that the income from salary is the income of the person who is the employee which in the instant case was the husband and that being so, it was assessable in the manner laid down in section 15 to 17 of the Act, in his hands alone and no part of it can be assessed in the hands of the wife. The interest of the wife in the said income by virtue of the customary law may, at the most, amount to application of income after it has accrued or arisen to the husband who is the employee. Serious anomalies would arise if we were to agree with the contention of the assessee that income from salary derived by one person is to be treated as income derived by two persons, because in that case, the person who is not an employee, who does not have anything to do with the employer and does not receive anything from him, will be deemed to be in receipt of salary from the employer and will also be entitled to standard deduction which is intended to cover expenses incidental to the earning of such income. It may also be observed that though the standard deduction is expressed in terms of percentage of the salary, there is a ceiling fixed for such allowance. If the income is assessed in entitled to claim standard deduction which, in a given case, may far exceed the ceiling or may go up to double the amount of the ceiling. We find it extremely difficult to accept such a submission. We, therefore, reject the same. We hold that the whole of the income from salary is assessable in employment and to whom it is due from the employer. The same will apply to remuneration received by a person working as managing director of a company because such remuneration will be assessed as income from salaries.
46. In the light of the foregoing discussion, we answer the first question as follows :
The Tribunal was right in holding that the income from business and share of income from the two partnership firms is to be assessed in the hands of the body of individuals consisting of the husband and wife. The Tribunal, however, was not correct in holding that interest earned on bank accounts was also assessable in the hands of the body of individuals. It has to be assessed in the hands of the respective co-owners on whose investment such interest has been received.
So far as question No. 2 is concerned, we answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue.
So far as question No. 3 is concerned it is answered in the affirmative, i.e. in favour of the Revenue and against the assessee.
47. Under the facts and circumstances, we make no order as to costs.