Karnataka High Court
Commissioner Of Income-Tax vs L.N. Horkeri on 10 July, 1986
Equivalent citations: [1986]162ITR513(KAR), [1986]162ITR513(KARN)
Author: K. Jagannatha Shetty
Bench: K. Jagannatha Shetty
JUDGMENT
K. Jagannatha Shetty, Actg. C.J.
1. This is a reference under section 256(1) of the Income-tax Act, 1961. The question referred is as under :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in confirming the Appellate Assistant Commissioner's order who has held that share income of the minor children cannot be clubbed in the hands of the assessee under section 64 of the Income-tax Act as there was no income assessable in the status of an individual apart from the share income of the minors ?"
2. The assessee is an individual. He has two minor sons who were admitted to the benefits of the partnership in a firm called M/s. Channabasaveshwara Trading Co. He had no separate income of his own. He, therefore, did not include in his return the share income of the minor sons accrued to them from the firm. The Income-tax Officer thought that it was illegal to exclude the minor's income. He assessed the share income of the two minors in the hands of the assessee as required under section 64(1)(iii) of the Income-tax Act.
3. The assessee preferred an appeal challenging the order of assessment before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner took a different view. He observed that since there was no separate income of the assessee to be assessed, section 64(1)(iii) of the Income-tax Act has no application to bring to tax the minors' income in the hands of the assessee. Thus, he allowed the assessee's appeal.
4. The Revenue preferred an appeal to the Appellate Tribunal. It was urged before the Tribunal that under section 64(1)(iii) of the Income-tax Act, the share income of the minors is assessable in the hands of the assessee in the status of an individual, although the assessee has no separate income of his own. The Tribunal also did not accept that contention. It held that when the individual has no income of his own, the question of computing his total income under section 64(1) does not arise. For the application of section 64(1)(iii), there should first be computation of total income of the assessee and then the minor's income falls for inclusion and if there is no income of the assessee for computation, there is no question of including the share income of the minors. So stating, the Tribunal confirmed the view taken by the Appellate Assistant Commissioner.
5. The question raised for our opinion is short, but interesting. The answer to the question turns on the interpretation to be placed on the relevant provisions of section 64(1) of the Income-tax Act :
"Section 64. Income of Individual to include income of spouse, minor child, etc. - (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly - ...
(iii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm."
Clause (iii) of sub-section(1) of section 64 provides that in computing the total income of an individual there shall be included all such income as arises directly or indirectly to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm. Under sub-section(1), there shall be computation of "the total income of any individual". In other words, what is required to be done thereunder is to compute the total income of an individual and while computing it, the income of the minors arising from the benefits of partnership in a firm should be included. The income of the individual, in the context, does not necessarily mean the profits. It may mean also losses. To put it in mathematical terms, the total income of any individual may be "plus income" or "nil income" or "nil income" All these would be the result of computation of the total income of any individual and to such income, the minor's income falls for inclusion.
6. In Dr. T. P. Kapadia v. CIT ([1973] 87 ITR 511 (Mys)), this court, while dealing with the scope of section 64 of the Income-tax Act, observed thus (at page 512 headnote) :
"The share of loss of the wife in the registered firm in which the assessee was also a partner can be set off against the income of the assessee while computing his total income."
7. In CIT v. Harprasad & Co. P. Ltd. [1975] 99 ITR 118, the Supreme Court, while dealing with the scope of the income chargeable to capital gains tax, observed (at page 124) :
"From the charging provisions of the Act, it is discernible that the words 'income' or 'profits and gains' should be understood as including losses also, so that, in one sense'profits and gains' represent 'plus income' whereas losses represent 'minus income'. In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee."
8. "Total income" has been defined under section 2(45) of the Income-tax Act, 1961, to mean the total amount of income referred to in section 5 computed in the manner laid down in the Income-tax Act. The income in order to come within the purview of that definition may comprise of "profits and gains" representing both positive or negative profits or it may be "nil profit". It may not be, therefore, proper to state that if an individual has got nil income, the minor's income shall not be included in his total income. Such an interpretation would defeat the purpose of section 64(1). On the contrary, the interpretation that we have accepted would effectuate the intention of the Legislature.
9. In a fiscal status, as observed by a Full Bench of this court in C. Arunachalam v. CIT [1985] 151 ITR 172, "the provisions in a fiscal statute are not to be construed as to furnish a chance of escape and a means of evasion". Section 64(1) was enacted to foil an individual's attempt to avoid or reduce incidence of income-tax by transferring his assets to his wife or minor child. If the interpretation put by the Tribunal is accepted, then it may be possible for an individual to so manage his affairs as to distribute his income to his minor child or wife and avoid tax. The court should avoid such interpretation as would defeat the intent and purpose of the legislation.
10. For these reasons, we are not inclined to accept the view taken by the Tribunal.
11. In the result, we answer the question in the negative and in favour of the Revenue.