Kerala High Court
Dr. K. Thomas Varghese vs Commissioner Of Income-Tax on 6 March, 1986
Equivalent citations: [1986]161ITR21(KER)
Author: M. Fathima Beevi
Bench: M. Fathima Beevi
JUDGMENT Balakrishna Menon, J.
1. The Income-tax Appellate Tribunal, Cochin Bench, has referred the following question for the decision of this court under Section 256(1) of the Income-tax Act:
"Whether, on the facts and in the circumstances of the case, having regard to the provisions of Section 64(1) of the Income-tax Act, 1961, the Tribunal was justified in aggregating in the total income of the assessee, the share income and the salary income derived by the assessee's wife from the firm, M/s. K. T. C. M. Hospital, in which the assessee and his wife were both partners ?"
The question is common for the assessment years 1974-75, 1975-76 and 1976-77.
2. The assessee and his wife are both doctors by profession and are partners of the firm by name M/s. K.T.C.M. Hospital. The firm is constituted of three partners with effect from April 1, 1959, The third partner is the assessee's father who is not a doctor by profession. The relevant Clauses 1 to 13 of the partnership deed are extracted in the statement of the case forwarded to this court by the Tribunal. We need advert only to the salient features of these clauses relating to the firm. The objects of the firm are carrying on general medical practice including surgery and for that purpose to run a medical dispensary and do all other activities conducive to the proper conduct of a pucca hospital. The assessee's father shown as first partner has invested capital for land, building, equipments, etc. The assessee and his wife being qualified doctors are to contribute their professional services for running the hospital. The assessee's father is in charge of the accounts and registers and other documents relating to the partnership. The firm is to be managed by the assessee and he will be in charge of all matters relating to the administration of the hospital. The assessee and his father are each entitled to 45% of the net profits of the firm. The assessee's wife is entitled to the remaining 10% besides a fixed remuneration at the rate of Rs. 500 per mensem.
3. The Income-tax Officer as per separate orders of assessment relating to the three assessment periods held that the firm is carrying on a business in which both the assessee and his wife are partners and the income derived by the wife from the firm is to be aggregated with the income of the assessee under Section 64(1)(i) of the Act. The Appellate Assistant Commissioner held that the firm is not one carrying on business and Section 64(1)(i) cannot be applied to the facts of the case. In appeal, at the instance of the Revenue, the Tribunal held that for the reason of joinder of the assessee's father as a partner of the firm, it cannot be said that the firm is one carrying on a profession. It would, therefore, fall under Clause (i) of Sub-section (1) of Section 64 of the Act as a firm carrying on business and the share of income due to the wife including the remuneration received by her is to be aggregated with the income of the assessee for the purpose of computing his total income under the Act.
4. The finding of the Tribunal in paragraph 12 of its order relating to the three appeals before it is extracted below :
"If in the present case all the three partners were professional partners, it was clear that the firm would be carrying on a profession, i.e., profits earned by the partners would be from carrying on of the profession. However, such is not the case here. One of the partners who was having share of 45% (the assessee also having 45% and his wife 10%) was not a medically qualified person. The assessee and his wife were no doubt offering their professional and technical skill, but as described in Clause 5 of the deed and, in our opinion correctly, this was for carrying on the business of the firm. The surplus which resulted at the end of the year to the firm was not only attributable to the utilisation of the professional and technical skill of the assessee and his wife but derived from other facilities also which were provided by the firm. The firm, in the present case, was providing medical facilities including surgical facilities and one of the elements was the professional services of the assessee and his wife but there were several other elements also which together went to constitute full surgical and medical facilities. There is income from medicines, X-ray charges, etc. In our view, a review of all the factors would show that the present is a case where two professionals, i.e., the assessee and his wife, have lent their services for the benefit of a firm which carries on a commercial activity. The assessee and his wife were partners of a firm carrying on a business within the meaning of Section 64 of the I.T. Act 1961. In coining to this conclusion, we have given anxious thought to the present day requirements of having an efficient administrator in any large organisation of professionals. Administrative services can be procured even if the administrator is not a partner. However, where the administrator who is not professionally qualified is taken in as partner and the income of the firm is not confined to income attributable only to the services rendered by the professional partners, it is not possible to subscribe to the view that the firm is one carrying on a profession within the meaning of the term 'profession' in the I.T. Act 1961. Such firm has to be held to be a firm carrying on a business within the meaning of the term 'business' in the I.T. Act, 1961. In such an event, the provisions of Section 64(1) which are absolute straightaway apply and the share incomes have to be aggregated."
5. Counsel for the Revenue strongly urges that on the finding of the Tribunal that the firm is carrying on a business and in the absence of a specific challenge against the said finding, it is not open to this court to consider the question whether the firm is carrying on a profession to take it out of Clause (i) of Sub-section (1) of Section 64 of the Act and the question referred is to be answered in favour of the Revenue. Counsel relies on the decisions of the Supreme Court in Agha Abdul Jabbar Khan v. CIT [1971] 82 ITR 872, Hooghly Trust (Private) Ltd. v. CIT [1969] 73 ITR 685 and Kammchand Thapar & Brothers (P.) Ltd. v. CIT [1971] 80 ITR 167, in support of the above proposition. We do not, however, think that the matter is that simple and the reference can be disposed of summarily, treating the inferences drawn by the Tribunal in the passage extracted above, as a finding of fact. The Tribunal has found that both the assessee and his wife are doctors carrying on the profession of medicine. It has also found that the firm is carrying on the activities relating to the professional services of the assessee and his wife, and but for the presence of the assessee's father as a partner of the firm, the firm would be one carrying on a profession. The question whether merely for the joinder of a non-professional man as a partner for the purpose of investment in capital and equipments, the firm will become one carrying on a business arises for decision on the question referred by the Tribunal to this court. The inferences drawn by the Tribunal are not on questions of fact and the correctness of those inferences fall within the ambit of the question referred. If, as found by the Tribunal, the activities of the firm are the professional activities of the assessee and his wife, we are clearly of the view that by reason of the joinder of the assessee's father as a partner for the purpose of investment in land, buildings and equipments and for the purpose of maintaining accounts, it cannot be said that the firm is carrying on a business falling under Clause (i) of Sub-section (1) of Section 64 of the Act. If the only partners of the firm are the assessee and his wife, even according to the Tribunal, it will be a firm carrying on a profession. If the activities of the firm are not in any way altered or enlarged by reason of the assessee's father also being a partner, we fail to see how the firm can be said to be one carrying on a business.
6. Clause (13) of Section 2 defines "business" to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The expression "profession" is defined in Section 2(36) to include vocation. Section 64 of the 1961 Act corresponds to Section 16 of the 1922 Act. The definition of "business" is identical in both the Acts. The 1922 Act did not contain a definition of the expression "profession". Under Section 16(3)(a)(i) of the 1922 Act, in computing the total income of any individual for the purpose of assessment, so much of the income of his wife as arises directly or indirectly from the membership of the wife in the firm of which he is a partner is also to be included. Section 64(1)(i) of the 1961 Act makes a significant alteration confining aggregation to such income as arises directly or indirectly "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. As per this provision of the 1961 Act, aggregation is permitted only in respect of income from a firm carrying on business, in which both the spouses are partners. Under the earlier Act of 1922, whether the firm was carrying on a business or not, the share of income due to the wife from the firm of which both the spouses are partners, was to be aggregated. The alteration is intended to serve a deliberate purpose. If both the spouses are partners of a firm carrying on a professional activity which requires intellectual skill and professional equipment, the share of income that each of the spouses derives is attributable to the professional equipment and skill of the person concerned and such income is not to be aggregated with the income of his or her spouse for the purpose of assessment under the Act. Thakkar J., on behalf of a Division Bench of the Gujarat High Court, consisting of himself and Mankad J., refers to the speech of the Finance Minister introducing the Income-tax Bill of 1961 at page 156 in CIT v. Dr. K.K. Shah [1982] 135 ITR 146. The relevant extract of the speech is as follows (p. 156):
"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."
7. It is thus clear that the provision for clubbing in the modified form was accepted by Parliament on the recommendation of the Law Commission that clubbing should not be applied to partnerships where husband and wife are partners engaged in a profession such as that of doctors, lawyers, etc. The Gujarat High Court came to the following conclusion at page 157 on the interpretation of Section 64(1)(i) of the Act:
"We are, therefore, of the opinion that when professional couples such as a doctor-husband and a doctor-wife or a lawyer-husband and a lawyer-wife or an architect-husband and an architect-wife form a partnership for the purpose of carrying on a professional activity which would fall within the scope of the interpretation in Dr. Devendra Surti's case, AIR 1969 SC 63, their income is not liable to be clubbed together under Section 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 escape the clutches of the clubbing provision even in respect of its income which can be said to be an income arising in the context of his business activities as distinguished from professional activities."
8. The question in Dr. Devendra Surti's case, AIR 1969 SC 63; 34 FJR 376 (SC) referred to by the Gujarat High Court was as to whether a doctor's dispensary is a "commercial establishment" within the meaning of the Bombay Shops and Establishments Act, 1948. The Supreme Court, at page 67 of AIR 1969 SC observes:
"7. It is, therefore, clear that a professional activity must be an activity carried on by an individual by his personal skill and intelligence. There is a fundamental distinction, therefore, between a professional activity and an activity of a commercial character and unless the profession carried on by the appellant also partakes of the character of a commercial nature, the appellant cannot fall within the ambit of Section 2(4) of the Act. In National Union of Commercial Employees v. M.R. Meher, Industrial Tribunal, Bombay, [1962] Supp. (3) SCR 157; AIR 1962 SC 1080, it was held by this court that the work of solicitors is not an industry within the meaning of Section 2(j) of the Industrial Disputes Act, 1947, and, therefore, any dispute raised by the employees of the solicitor against them cannot be made the subject of a reference to the Industrial Tribunal"
9. The Supreme Court refers to the following observation of Scrutton, L.J. in Commissioners of Inland Revenue v. Maxse [1919] 1 KB 647 at p. 657:
"I am very reluctant finally to propound a comprehensive definition. A set of facts not present to the mind of the judicial propounder, and not raised in the case before him, may immediately arise to confound his proposition. But it seems to me as at present advised that a 'profession' in the present use of language involves the idea of an occupation requiring either purely intellectual skill, or of manual skill controlled, as in painting and sculpture, or surgery, by the intellectual skill of the operator, as distinguished from an occupation which is substantially the production or sale or arrangements for the production or sale of commodities. The line of demarcation may vary from time to time. The word 'profession,' used to be confined to the three learned professions, the Church, Medicine and Law. It has now, I think, a wider meaning."
10. In National Union of Commercial Employees' case, AIR 1962 SC 1080, 22 FJR 25, Gajendragadkar J. (as he then was), speaking for the Court, stated at page 1084 of AIR 1962 SC and at p. 29 of 22 FJR:
"The distinguishing feature of an industry is that for the production of goods or for the rendering of service, co-operation between capital and labour or between the employer and his employees must be direct and must be essential,"
11. The above observation of the Supreme Court clearly makes out the distinction between an industrial concern and a firm of professional men. The fact that different categories of servants are employed, each category being assigned separate duties and functions, does not render a firm of professionals as one carrying on business. The National Union of Commercial Employees' case, AIR 1962 SC 1080; 22 FJR 25, related to a firm of solicitors where the Supreme Court observed that subsidiary work purely of an incidental type intended to assist the solicitor in doing his job has no direct relation to the professional service ultimately rendered by the solicitor. A solicitor may for his own convenience employ a clerk because a clerk would type his opinion. He may employ a menial servant to keep his chamber clean and in order. It is also quite likely that the number of clerks and other employees may be large if the concern is prosperous. But it was held that the work done by the typist or the stenographer or the menial servant or other employees in a solicitor's firm is not directly concerned with the service the solicitor renders to his client. Since the services of the employees have no direct relation to the service of the solicitor to his client, it was held that a solicitor's firm is not an industry within the meaning of the Industrial Disputes Act and the firm is carrying on only a professional service. The Supreme Court in Devendra M. Surti's case, AIR 1969 SC 63 ; 34 FJR 376, held that a doctor's dispensary is not a commercial establishment within the meaning of the Bombay Shops and Establishments Act, 1948.
12. The question whether an advocate is carrying on a trade or business within the meaning of the proviso to Sub-section (3) of Section 11 of the Kerala Buildings (Lease and Rent Contract) Act, 1965, came up for decision before a Division Bench of this court in Sethurama Menon v. Meenakshi Amma [1966] KLT 665; AIR 1967 Ker 88. M. S. Menon C.J., stated on behalf of the Bench at page 666 (at p. 89 of 1967 AIR (Ker.) ):
"5. The expression 'trade or business' as we understand it, connotes a commercial activity. The expression 'profession' does not, and is virtually at the other end of the scale."
13. The learned judge refers to Ballentine's definition of the expression "profession", at page 667, as follows (at p. 89 of AIR 1967 Ker.) "A vocation in which a professed knowledge of some department of science or learning is used by its practical application to the affairs of others, either in advising, guiding or teaching them, or in serving their interests or welfare in the practice of an art founded on it."
"The word implies professed attainments in special knowledge as distinguished from mere skill. A practical dealing with affairs as distinguished from mere study or investigation; and an application of such knowledge to uses for others as a vocation, as distinguished from its pursuit for its own purposes."
14. The Division Bench held as follows (at p. 90 of 1967 AIR (Ker.): "Even assuming that the word 'business' is a word of ambiguous import and that it takes its content from its context, we do not think it can be said that the word 'business' in the expression ' trade or business' occurring in the proviso will include the profession of an advocate."
15. The question as to whether a firm of lawyers is a commercial establishment within the meaning of the Kerala Shops and Commercial Establishments Act, 1960, came up for decision before the Supreme Court in Sasidharan v. Peter and Karunakar, AIR 1984 SC 1700. The Supreme Court observed at p. 1702 :
"Whatever may be the popular conception or misconception regarding the role of today's lawyers and the alleged narrowing of the gap between a profession on the one hand and a trade or business on the other, it is trite that, traditionally, lawyers do not carry on a trade or business nor do they render services to 'customers'. The context as well as the phraseology of the definition in Section 2(13) is inapposite in the case of a lawyer's office or the office of a firm of lawyers."
16. When both the spouses are skilled in a profession such as of medicine, law, etc., and they derive income as partners of a firm engaged in the profession, the income of each spouse is to be separately assessed in their respective hands and cannot be clubbed together under Section 64(1)(i) of the Act. In the present case, the Tribunal has found that the firm is carrying on a business with both the spouses carrying on their profession as partners of the firm and but for the joinder of the assessee's father as a partner, the firm would be one carrying on a profession. Merely for the reason that a partner who has contributed land, buildings and equipments is not carrying on the profession that the firm is engaged in, does not in any way render the firm as one carrying on a business falling under Clause (i) of Sub-section (1) of Section 64 of the Act. Applying the principle stated by Gajendragadkar J. (as he then was) in National Union of Commercial Employees' case, AIR 1962 SC 1080; 22 FJR 25, the mere fact that a non-professional partner is looking after the accounts and doing incidental service to the firm does not also alter the nature of the firm as one rendering professional service of doctors, which for the reasons aforesaid are distinct from business or business activities. The decision in CIT v. Ramniklal Kothari [1969] 74 ITR 57 (SC), referred to by the Tribunal in its order does not deal with the question arising for decision in this reference.
17. For the aforesaid reasons, we answer the question referred to this court in the negative, i. e., in favour of the assessee and against the Department.
18. A copy of this judgment under the seal of the court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.