Income Tax Appellate Tribunal - Pune
Mrs. Sadhana Gunwant Shah vs Income-Tax Officer on 22 April, 1991
Equivalent citations: [1991]38ITD19(PUNE)
ORDER
--Provisions of section 64(1)(ii) not attracted. Ratio:
Facts of the case shows that provisions of section 64(1)(ii) were not attracted, therefore, order of assessing officer was not erroneous and prejudicial to the interest of revenue.
Held:
The spouse of the assessee has the requisite professional and technical qualifications and the salary and commission paid was solely attributable to the application of his technical or professional knowledge and experience. The returns of the firm were filed in time which goes to prove that the accounts of the firm have been regularly maintained by the spouse of the assessee. The prompt filing of returns would not have been possible but for the correct, complete and systematic books of account maintained by the spouse in the normal course of business utilisng his knowledge and experience as an accountant attributable to his qualification of B. Com. degree. Even considering the nature of the job performed by the spouse, namely, maintenance of accounts, looking after sales, etc., the degree possessed by him is the requisite technical or professional qualification and therefore, the proviso to section 64(1)(ii), is clearly not attracted. In this view of the matter, therefore, the Commissioner was not justified in invoking the jurisdiction under section 263 and enhancing the income as directed in his order.
Case Law Analysis:
Dr. J.N. Mokashi v. ITO (1983) 3 ITD 774 (Bom)(SB) and CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC) applied.
Application:
Also to current assessment years.
Income Tax Act 1961 s.263 ORDER T.V.K. Natarajachandran, Accountant Member
1. These appeals by the assessee are consolidated and disposed of by a common order for the sake of convenience, as they involve common issue.
2. These appeals pertain to assessment years 1986-87, 1987-88 and 1988-89 and arise out of the consolidated/revisional order of the CIT Kolhapur dated 1-3-1989 wherein he has held that Shri Gunwant J. Shah, husband of the assessee, does not possess any technical or professional qualification relating to manufacture of chemicals required in the textile industry and therefore, remuneration/commission received by him has to be assessed in the hands of the assessee who is a partner in the firm M/s. Pooja Sales Corporation of Udgaon in terms of Section 64(1)(ii) of the Income-tax Act, 1961. In this view of the matter, therefore, he held that the orders passed by the assessing officer were erroneous insofar as they were prejudicial to the interest of revenue in terms of Section 263 of the Income-tax Act, 1961 and after observing due process of law enhanced the assessments for these years by the amounts of remuneration/ commission received by Shri Gunwant J. Shah in the assessments of the assessee for these years. Hence the appeals by the assessee to the Tribunal.
3. The relevant facts are that the assessee is a partner in M/s. Pooja Sales Corporation at Udgaon holding 80% of share of profit therein. Therefore, she is substantially interested in that concern. The firm paid remuneration of Rs. 24,000 each for these years and a commission of Rs. 8,200 for the assessment year 1988-89 to Shri Gunwant J. Shah, the spouse of the assessee. He is a Commerce Graduate holding B.Com. degree of the Pune University awarded in the year 1974. Original assessments were completed by the assessing officer without invoking the provisions of Section 64(1)(ii) of the Income-tax Act, 1961. This was considered to be erroneous insofar as it was prejudicial to the interest of revenue inasmuch as Shri Gunwant J. Shah did not possess any technical or professional qualification and hence should have included the remuneration and commission received by him in the assessment of the assessee in terms of Section 64(1)(ii) for these years. The assessee's contention before the CIT was that Shri G.J. Shah had experience of working in private firms at Bombay and Jaysingpur for two years drawing salary of Rs. 2000 plus commission. He has gained ten years' experience and from assessment year 1986-87 commission is also paid if sales exceeded Rs. 5 lakhs and he is a full time accountant of the concern. The CIT relied on the judgment of the Karnataka High Court in the case of CIT v. D. Rajagopal [1985] 154 ITR 375 and adopted the strict interpretation placed by the High Court regarding fulfilment of twin conditions envisaged by the proviso to Section 64(1)(ii) of the Income-tax Act, 1961. Applying the strict interpretation, the CIT came to the conclusion that Shri G.J. Shah does not possess any technical or professional qualification relating to the concern which manufactures chemicals required in the textiles industry and therefore, remuneration and commission paid to him was to be included in the hands of the assessee who is a partner in the firm M/s. Pooja Sales Corporation. Accordingly, he concluded that the orders passed by the ITO were erroneous and prejudicial to the interest of revenue in terms of Section 263(1) of the Income-tax Act, 1961 and therefore, he modified those assessments and enhanced the assessments by the amount of remuneration and commission paid to Shri G.J. Shah.
4. The learned counsel for the assessee, besides reiterating the grounds taken by the assessee, relied on the judgments of the Madhya Pradesh High Court in the case of CIT v. Madhubala Shrenik Kumar [1990] 181 ITR 180, Kerala High Court in the case of CIT v. Sorabji Dorabji [1987] 168 ITR 598, Andhra Pradesh High Court in the case of Batta Kalyani v. CIT [1985] 154 ITR 59 and the order of the Tribunal, Special Bench in the case of Dr. J.N. Mokashi v. ITO [1983] 3 ITD 774 in support of his contention that the CIT was not justified in invoking jurisdiction under Section 263 as Shri G.J. Shah had the requisite qualification and experience so as to accept the application of Section 64(1)(ii). He pointed out that the finding of the CIT regarding professional qualification concerned with the manufacture of chemicals was not relevant because in that matter even the partners were not technically qualified and indeed none in the concern was qualified so to say. Still the business of the concern was being carried on. On the other hand, relying on the order of the Tribunal, Special Bench, in the case of Dr. J.N. Mokashi (supra) he submitted that guidelines have been laid down by the Tribunal regarding technical and professional qualifications and experience to be adopted and if so adopted the case of the assessee falls squarely within the proviso to Section 64(1)(ii) and therefore, the orders passed by the assessing officer were not erroneous and prejudicial to the interest of revenue and the CIT was not justified in invoking the jurisdiction under Section 263 of the Income-tax Act, 1961.
5. The learned departmental representative, on the other hand, relied on the judgment of the Karnataka High Court in the case of D. Rajagopal (supra) wherein strict interpretation was adopted by the High Court.
6. In reply, the learned counsel for the assessee submitted that the spouse of the assessee is maintaining accounts of the firm and looks after the sales and recoveries from the debtors and therefore, commerce degree possessed by him is most useful to the concern and therefore, remuneration and commission paid was attributable to the professional knowledge and experience.
7. After due consideration of the submissions of the parties, I am of the opinion that the spouse of the assessee possesses technical or professional qualification for the job assigned to him and the salary and commission paid to him is solely attributable to the application of his technical and professional knowledge and experience as envisaged in the proviso to Section 64(1)(ii) so as to accept the case of the spouse from the application of Section 64(1)(ii) of the Income-tax Act, 1961. The facts of the case have already been stated above. The genuineness of the payment of salary and commission and the reasonableness thereof are not disputed or doubted. This fact is evidenced from the revisional order of the CIT and is also reinforced by the facts that the spouse of the assessee was already drawing salary of Rs. 2,000 plus commission in previous employments in Bombay and Jaysingpur.
8. Coming to possession of requisite technical or professional qualifications, the Karnataka High Court in the case of D. Rajagopal (supra) upheld the finding of the Tribunal that the salary income of that assessee should be excluded from his assessment and included in the income of his spouse who was a partner in the firm M/s. Gopal Films on the ground that the assessee was a mere degree holder and in the context of the business of the concern, it could not be considered as professional or technical qualification and the experience gained in that concern could not be referable to the qualification he possessed. It is quite obvious that the exact nature of the services rendered by that assessee was not brought on record though he was styled as managing director of a firm which is incongruous because only in the case of company managing director is appointed and not in the case of a firm. Though that concern is styled as M/s. Gopal Films, the role played by the assessee, if any, in managing that concern has not been brought on record. Therefore, the question of possession of professional or technical qualification was considered in the context of nature of business of the firm. Since he happened to be a mere graduate and the husband of one partner of the firm, the strict test of professional and technical qualification was applied and it was also held that the experience gained in that business was not referable to the qualification possessed by him. It is relevant to note that in the case of D. Rajagopal (supra) he himself disputed from the very beginning of assessment that the salary paid as managing director of the firm should be excluded from his assessment in terms of Section 64(1)(ii) of the Income-tax Act, 1961 and should be included and assessed in the hands of his wife. This clearly shows that there was admission on the part of the assessee that he did not possess the requisite technical and professional qualification so as to justify the assessment of salary in his own hands. The ITO included the salary in the assessment of Shri D. Rajagopal and the AAC confirmed the assessment. The Tribunal reversed the order of the AAC and while doing so, it gave a finding of fact that the assessee did not possess any technical or professional qualification in terms of Section 64(1)(ii) of the Income-tax Act, 1961 and, therefore, the salary income of the assessee should be excluded from his assessment and included in the income of the spouse who was a partner in the said firm because she had substantial interest in the firm being 80% shareholder. Therefore, the finding of the Tribunal which is a fact finding authority is in consonance and in harmony with the contentions of the assessee that he did not possess the requisite technical or professional qualification so as to justify the assessment of salary in his personal assessment. In other words, the negative claim of the assessee in that case based on non-possession of technical and professional qualification has been approved by the Tribunal by applying the test of possession of the requisite technical or professional qualifications and whether salary received was solely attributable to application of such technical or professional knowledge and experience.
9. The finding of the Tribunal was upheld by the Karnataka High Court. In view of the nature of business of the firm, the mere degree qualification possessed by Shri Rajagopal was not considered to be professional or technical qualification and the experience gained in that business was held to be not referable to the qualification he possessed. Therefore, in the facts and circumstances of that case, especially the negative claim made by the assessee in that case supported the finding of the Tribunal, and thus the conclusion of the High Court was in favour of that assessee and against the department. There could be no dispute about the correctness of the judgment based on the peculiar facts of that case.
10. In the case of the assessee, the decision of the Andhra Pradesh High Court in the case of Batta Kalyani (supra) was relied upon by the learned counsel for the assessee. In that case, the Andhra Pradesh High Court laid down a harmonious construction of the two parts of the proviso to Section 64(1)(ii) of the Income-tax Act, 1961 as according to it the words "technical or professional qualifications" occurring in the first part of the proviso did not necessarily relate to technical or professional qualifications acquired by obtaining a certificate, diploma, degree or in any other form from a recognised body like University or any Institute. It observed that if that was the intention of the Legislature, the same could have been used in the latter part of the proviso, but instead the words "technical or professional knowledge and experience" were used. At page 62 of the said judgment, a harmonious construction was given by the High Court which reads as under :-
The harmonious construction of the two parts of the proviso, in our opinion, would be that if a person possesses technical or professional knowledge and the income is solely attributable to the application of such technical or professional knowledge and experience, the requirement for the application of the proviso is satisfied, although the person concerned may not possess any qualification issued by a recognised body. In our opinion, the Tribunal erred in coming to the conclusion that unless a recognised body conferred a qualification, it should not be considered that a person possessed technical or professional qualifications. It is enough, in our opinion for the purpose of the proviso if the recipient of the salary possesses the attributes of technical or professional qualifications, in the sense that he has got expertise in such profession or technique. If by the use of that expertise in the profession or technique, the person concerned earns salary, then the latter part of the proviso is also satisfied.
Though the judgment in that case was against the assessee, the harmonious construction laid down is quite relevant. It would be clear from the aforesaid observations that if the attributes of technical or professional qualification are possessed by the recipient of the salary which means expertise in such profession or technique and by use of such expertise the recipient earns salary even the condition in the latter part of the proviso was also satisfied. In other words, the Andhra Pradesh High Court has laid down the test of expertise in profession or technique as amounting to technical or professional qualification and it has ruled that technical or professional qualification did not relate to obtaining of certificate or diploma or degree from a recognised University or Institute. Thus the Andhra Pradesh High Court emphasised the job oriented attributes of technical and professional qualifications or expertise in profession, technique of profession as sufficient so as to satisfy the latter part of the proviso to Section 64(1)(ii) of the Income-tax Act, 1961.
11. The Kerala High Court in the case of Sorabji Dorabji (supra) was concerned with the same issue but adopted the harmonious construction laid down by the Andhra Pradesh High Court in the case of Batta Kalyani. In that case, the Tribunal found that Smt. Sorabji Dorabji acquired sufficient professional experience by virtue of her experience as director from 1963 onwards. Such expertise acquired amounted to possession of a professional qualification as contemplated by the proviso to Section 64(1)(ii) of the Income-tax Act, 1961. So the salary paid to her was attributable to the application of her professional knowledge and experience.
12. Similarly, the Madhya Pradesh High Court, Indore Bench, in the case of Madhubala Shrenik Kumar (supra) adopted the harmonious construction laid down by the Andhra Pradesh High Court in the case of Batta Kalyani. In that case, the husband of the assessee was employed as a salesman who had experience as a salesman and in consideration of whose services salary was paid to him. The Tribunal found that he possessed the requisite experience as a salesman, that the firm was entirely dependent on the salesmanship of such person, that the firm had not employed any other salesman and the amount of salary paid was for his professional experience utilised by the firm in the conduct of its business. On such findings, proviso to Section 64(1)(ii) was applied.
13. Therefore, it is clear from the rulings of the Andhra Pradesh, Kerala and Madhya Pradesh High Courts that a harmonious construction was preferred to be followed to strict interpretation of Karnataka High Court regarding possession of technical or professional qualifications and the attribution of income to the application of technical or professional knowledge and experience. Since majority of the High Courts is in favour of the assessee, i.e., in favour of application of proviso to Section 64(1)(ii), I prefer to follow the majority view rather than the view of the Karnataka High Court relied upon by the CIT.
14. Further the Special Bench of the Tribunal had occasion to resolve the conflict of decisions among the Benches of the Tribunal on this vexed issue in the case of Dr. J.N. Mokashi (supra). The relevant observations of the Special Bench are as follows:
36. Thus, we see that the term 'technical' is understood to include certain characteristics of specialisation relatable to a particular subject. The term 'profession' is sometimes used in a narrow sense so as to mean the learned professions or an occupation requiring a high level of training and proficiency. In a wide sense, it means any calling involving intellectual skill or manual skill ultimately controlled by intellectual skill. In a still wider sense, it means any calling or occupation by which a person habitually earns his living. This is as per the Shorter Oxford English Dictionary. Thus while the narrow meaning of 'profession' implies specialised knowledge and intensive training and preparation preceded by instructions in skills and methods, a reasonably broader or wider meaning given to 'profession' would mean any occupation or vocation requiring intellectual skill or requiring manual skill as controlled ultimately by intellectual skill. In this connection, we may refer to the Supreme Court observations in the case of CIT v. Manmohan Das [1966] 59 ITR 699. In that case, it has been observed that a profession involves occupation requiring purely intellectual or manual skill and it was held in that case that the work of a treasurer cannot be so regarded on the facts of that case.
37. Judged by the above tests which we have set out for ourselves, we consider it necessary to impart a wide or liberal sense to 'technical or professional qualifications'. We would not like, however, to go to the length of saying that a profession means any vocation or occupation by which a person earns his living. However, it involves, in our opinion, the exercise of intellectual skill or of manual skill as controlled by intellectual skill. Obviously, cases of chartered accountants, doctors, singers etc., would present no difficulty. There may be cases of carpenters or tailors where also we can clearly see professional activity. In fact, the Supreme Court had occasion to discuss the word 'profession' under the Expenditure Tax Act in the case of a politician and it was held that 'politics' is a 'profession' - CET v. P.V.G. Raju [1975] 101 ITR 465 (SC). On the other side of the fence will fall cases where the work may be merely of a manual type or where the work does not call for any intellectual skill at any stage as in the case of a mere filing clerk. On the other hand, a stenographer's job cannot be said to be a mere mechanical job as some intellectual skill is required. A typist can sit outside an office and earn income from typing for his clients. He can, therefore, indepedently earn his livelihood by his typing skill. Therefore, the work of a steno-typist or a typist can be considered as a professional activity. Similarly, an accounts-keeper may earn his livelihood by keeping accounts for a half dozen persons and earn his livelihood independently and without accepting any employment as such. Keeping accounts, therefore, can be considered as calling for professional skill, even when he works under one employer provided the mode of keeping accounts calls for intellectual skill. Therefore, an indication or a test for finding whether professional skill is involved is to see whether it requires or postulates intellectual skill or manual skill as controlled by intellectual skill and can furnish a source of independent livelihood to the person though that person might accept employment from his or her spouse. If on the other hand, the skill is such that it is not possible, hypothetically or objectively speaking to earn an independent livelihood as in the case of a professional typist or a professional accounts-keeper, it will not be possible to term it as involving professional qualifications. Again 'technical' would involve specialised training in a mechanical or scientific subject or in any particular subject. Therefore, each case will have to be decided on its own facts. We can only lay down general tests or principles as stated above.
38. The second requirement of the proviso to Section 64(1)(ii) is that the payments made to the spouse must be attributable to the application of technical or professional knowledge and experience. In fact, Shri Dastur pressed upon as an argument that the word 'and' at both the places in the proviso to Section 64(1)(ii) should be interpreted to mean 'or'. In our opinion, that would completely alter the meaning of the proviso. The argument cannot, therefore, be accepted. If a qualified spouse were to do a job to which her knowledge and experience are not to be put to any use, the proviso would not be applicable and the assessee will have to pay the penalty for engaging his spouse for doing a job to which the technical expertise or knowledge or professional skill cannot be harnessed. Similarly, the use of the word 'experience' cannot be treated as tautologous or a superfluity though a reasonable view should be taken of the length of the experience of the spouse when she is otherwise qualified professionally or technically and experience acquired in the course of acquiring the qualifications may be treated as experience for the purpose of the section. The very purpose of introducing the proviso is to carve out an exception to the rigorous provisions of Section 64(1)(ii) where even genuine cases of bona fide payments made to the spouse for actual services rendered by the spouse may enter the red light zone of addition. The standards of fairness and reasonableness which the assessee insisted upon us, as the unfailing guides in interpreting sections dealing with artificial income would be fully satisfied by our interpretation of the expression 'technical or professional qualifications' as also of the whole proviso. The interpretation which we have put is neither strict nor too liberal and we have only tried to see that the section is rendered workable and not rendered otiose.
After elaborately considering the contentions of the parties, the Special Bench summed up in para 39 of its order as follows :
4. 'Professional qualifications' means fitness to do a job or undertake an occupation or vocation requiring intellectual skill or requiring manual skill as controlled by intellectual skill and which is such that a person should be able to eke out a living therefrom independently though the salary does not cease to be the product of professional skill merely because a particular employment is accepted.
5. The term 'technical' implies specialised knowledge generally of a mechanical or scientific subject or of any particular subject.
7. 'Experience' as appearing in the proviso to Section 64(1)(ii) includes experience acquired in the course of acquiring technical or professional qualifications.
15. From the aforesaid decision of the Tribunal, applying wide sense of the term 'technical' any calling involving intellectual skill or manual skill ultimately controlled by intellectual skill would be covered by the term 'technical'. The Tribunal E Bench, Ahmedabad in the case of Dr. N.J.P. v. ITO [1983] 2 SOT 288 held as under:
Looking to the words used in Section 64(1)(ii), a wide and liberal construction should be given to the word 'technical' or 'professional' qualifications and anything which involves exercise of intellectual skill or of manual skill controlled by intellectual skill should come within the ambit of these words. An indication or a test for finding whether professional skill is involved is to see whether it requires or postulates intellectual skill and can furnish a source of independent livelihood to the person though that person might accept employment from his or her spouse. If, on the other hand, the skill is such that it is not possible, hypothetically or objectively speaking, to earn an independent livelihood as in the case of a professional typist or a professional accounts-keeper, it will not be possible to term it as involving professional qualification. To write books of account would certainly require intellectual skill, and since in this case, the income was solely attributable to the application of technical or professional knowledge and experience by the wife, the AAC was wrong in sustaining the disallowance of the salary paid to wife.
16. Applying the aforesaid decisions of the Tribunal. Special Bench and Ahmedabad Bench, I am satisfied that the spouse of the assessee has the requisite professional and technical qualifications and the salary and commission paid was solely attributable to the application of his technical or professional knowledge and experience. I was informed, at the time of hearing, that returns of the firm were filed in time which goes to prove that the accounts of the firm have been regularly maintained by the spouse of the assessee. For example, the return of the firm for the assessment year 1986-87 was filed on 23-3-1986 and the income returned was accepted under Section 143(1) of the Income-tax Act, 1961. Similarly, for the assessment year 1988-89, return was filed on 23-6-1988 and the income returned was accepted subject to obvious additions of inadmissible items. The prompt filing of returns would not have been possible but for the correct, complete and systematic books of account maintained by the spouse in the normal course of business utilising his knowledge and experience as an accountant attributable to his qualification of B.Com. degree. Even considering the nature of the job performed by the spouse, namely, maintenance of accounts, looking after sales etc., the degree possessed by him is the requisite technical or professional qualification and therefore, the proviso to Section 64(1)(ii) clearly attracted and is in accordance with the ratio of the Andhra Pradesh High Court in Batta Kalyani.
17. In this view of the matter, therefore, the CIT was not justified in invoking the jurisdiction under Section 263 and enhancing the income as directed in his order. Following respectfully the rulings of the majority High Courts, the decisions of the Tribunal and guideline given by the Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192, I hold that the CIT was not justified in revising the original orders passed by the ITO for these years and consequently the revisional orders are set aside and the assessments of the ITO are restored.
18. The appeals are allowed.