Madras High Court
Commissioner Of Income-Tax vs P.A. Venkataraman on 15 September, 1998
Equivalent citations: [2000]246ITR773(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu
JUDGMENT R. Jayasimha Babu, J.
1. The question is as to whether the words "total income" in sub-paragraph II of paragraph A in Part III of the Finance Act, 1986, which refers to the income of the individual would also include the income of other persons whose income is required to be treated as part of his income under Section 64 of the Income-tax Act, 1961, which occurs in Chapter V of the Income-tax Act, is the question that arises for consideration in this reference.
2. Sub-paragraph II of paragraph A of Part III of the Finance Act, 1986, prescribes the rates of income-tax in respect of a Hindu undivided family which at any time during the previous year has at least one member whose total income of the previous year relevant to the assessment year commencing on the 1st day of April, 1987, exceeds Rs. 18,000.
3. Section 64 of the Income-tax Act does not deal with, or refer to the Hindu undivided family. It provides for including the income of spouse, minor child, etc. Section 64 clearly recognizes the fact that the income of the spouse and the income of the minor child is not the income of the individual in whose hands such income has to be assessed. It is only for the purpose of assessment to tax that the income of others is to be included in the income of the assessee.
4. The Supreme Court, in the case of CIT v. Smt. P. K. Kochammu Amma, Peroke [1980] 125 ITR 624, after examining Section 64 of the Income-tax Act, held that it is clear from Section 64 of the Act that though the share of the spouse or minor child in the profits of a partnership firm in which the assessee is a partner is not the income of the assessee, but is the income of such spouse or minor child, it is liable to be included in computing the total income of the assessee and it would be assessable to tax in the hands of the assessee. The court further observed that the income of such minor or spouse would be part of "his income" for the purpose of assessment to tax and would have to be shown in the return of income filed by the assessee. The reason for so holding, as stated by the Supreme Court is that the charge of income-tax levied by the Act is on the total income of the assessee, and total income is defined in Section 2(45) of the Act to mean the total amount of income referred to in Section 5, computed in the manner laid down in the Act. That was held by the court to be subject to the other provisions of the Act and, therefore, if the income of any other person is declared by any provision of the Act to be includible in computing the total income of the assessee, such income would form part of the total income exigible to tax under Section 4 of the Act and as Section 64(1) was one such provision, the income of the spouse and minor was to be included in the income of the assessee.
5. Learned counsel for the assessee submitted that Section 64 of the Act has not declared that the income of the spouse or the minor children is the income of the other spouse or the parent, but it only makes that assessee's spouse or parent liable to include the income of the spouse or the minor child in his return and pay tax by treating the same as part of his income, and also pay the penalties in case of his failure to do so. That, however, according to counsel does not have the effect of making the income of others the income of the assessee for all purposes, and make the income of the minors includible in the income of the Hindu undivided family as the income of the member of the Hindu undivided family for the purpose of sub-paragraph II of paragraph A of Part III of the Finance Act, 1986. In support of his submission, counsel relied on the decision of the Supreme Court in the case of CIT v. Elphinstone Spinning and Weaving Mills Co. Ltd. [1960] 40 ITR 142 which case arose under the Finance Act, 1951, and the Indian Income-tax Act, 1922. It was held by the court in that case, that the words of paragraph B of Part I of the First Schedule to the Finance Act, 1951, could apply only when there was a total income, and those words were not appropriate to and failed in a case where a company had no total income, as in that case. It was also held by the court that as the words used in paragraph B of Part I of the First Schedule to the Finance Act, 1951, were excess dividend, the effect of paragraph B of Part I, was not to make the excess dividend into income or subjecting it to tax independently of the charge to tax on the total income. The proviso in paragraph B of Part I was held to be not an independent charging" section. Having held so, the court further held that the fiction created by the proviso to paragraph B of Part I of the First Schedule to the Finance Act, 1951, that the excess dividend shall be deemed to have come out of the undistributed profits of one or more years preceding the previous year, cannot be carried further than the purpose for which it has been put in, in the statute. The fiction had the effect of bringing profits of the earlier years into the immediately preceding previous year. But the fiction could not be carried further than what it was intended for, and could not be used to make those profits take the place of total income, which did not exist in the previous year and to which the rate is to be applied under the terms of the proviso. The court held that if the words of a taxing statute fail, then so must the tax. The courts cannot, except rarely and in clear cases, help the draftsmen by a favourable construction.
6. Counsel for the assessee also relied on the decision of the Allahabad High Court in the case of CIT v. Nathimal Gaya Lal [1973] 89 ITR 190 [FB], in judgment of the Full Bench of that court reported in [1973] 89 ITR 190, particularly the passages at pages 197 and 198 which dealt with the limits up to which fiction can be carried. Counsel referred to the passages quoted therein. More particularly the quotation, inter alia, to the effect that no fiction shall extend to work an injury, and that its proper operation is only to prevent a mischief or remedy or inconvenience that might result from the general rule of law.
7. Counsel for the Revenue on the other hand relied on the decision of the apex court in the case of CIT v. Smt. P. K. Kochammu Amma, Peroke [1980] 125 ITR 624.
8. In this case, it is not in dispute that the member of the undivided family who had been assessed to an income of Rs. 18,000 did not himself in his own right have an assessable income. He was assessed to tax only by reason of inclusion of the income of the minors under Section 64 of the Act. Those minors were not members of the Hindu undivided family. Had those minors attained the age of majority and been subjected to tax directly, their income would not have been treated as the income of the assessee and in any event their income would not be treated as income received by the member of the Hindu undivided family.
9. The inclusion of the income of the spouse and the minor, in the income of the other spouse or of the parent in terms of Section 64 of the Act, is meant to ensure that the income so derived by the spouse or minor is taxed in the hands of the other spouse or parent at the appropriate rate and it is for that purpose that their income is to be regarded as part of the total income of the assessee. As has been held by the Supreme Court, Section 5 of the Income-tax Act is subject to the other provisions of the Act including Section 64 and, therefore, income which is required to be included in the income of the assessee though not includible strictly in terms of Section 5 of the Act nevertheless should be regarded as part of the total income.
10. The words used in sub-paragraph II of paragraph A of Part III of the Finance Act, 1986, as noticed at the outset are "one member whose total income . . .". If the income of the assessee for the purpose of income-tax is to include the income of the minors and that income is part of his total income, it becomes part of his total income under the Act and chargeable to tax accordingly. The words used in the Finance Act, 1986, are with reference t'o a member of a Hindu undivided family for the purpose of making the income of such a Hindu undivided family subject to the tax at a higher rate.
11. The reference to total income in the Finance Act, 1986, is the total income as computed under the Income-tax Act. That provision does not contemplate going behind the assessment for the purpose of bifurcating the income of the assessee into the income of the minors and his own income thereafter determining as to whether the income of the member of the Hindu undivided family is or is not in excess of Rs. 18,000. For the sake of convenience it is the total income as computed under the Act, which is to be the basis for making the provisions of sub-paragraph II of paragraph A of Part III of the Finance Act, 1986, applicable.
12. Section 64 of the Act does not, as contended by counsel for the assessee, create any fiction. It specifically provides for the inclusion of the income of the spouse and minor child in the income of the other spouse or parent, and the occasion to include their income arises out of the provisions of the Act and is to be treated as part of the total income of the assessee. Though the effect of such treatment can also be described as deeming" the income of the minor to be that of the income of the parent, it is not so much by deeming, as by specific requirement that that income be included in the income of the parent, that it is treated as part of the total income. After it is so treated as forming part of the total income, it remains a part of the total income and is not required to be deleted therefrom, once the inclusion is properly made. That is the reason why an assessee who fails to include the income required to be included under Section 64 of the Act, is subject to penalties, if he fails to file his return showing such income also as part of his total income.
13. The total income so determined under the Act is the total income that is referred to in the Finance Act, 1986. The reference is not to the total income of the individual, but it is the total income of a member. In order to determine the scope of the total income one has to look into the provisions of the Act, and once it is found that the total income as determined under the Act exceeds the amount specified in the Finance Act, 1986, in sub-paragraph II of paragraph A of Part III that sub-paragraph will apply.
14. The facts of the case considered by the Supreme Court with reference to the Finance Act, 1951, were altogether different. That Act merely provided that the excess dividend shall be treated as part of the profits of the previous years. It had not declared further that it shall be treated as the income of the previous year liable to be taxed. It is in that context, the Supreme Court held that the words used in paragraph B of Part I of the First Schedule to the Finance Act, 1951, were insufficient to create a charge for tax on those dividends. There is no such difficulty here. The words used in the Finance Act are clear. It refers to the total-income and that total income has to be ascertained by applying the provisions of the Act.
15. Our answer to the question referred to us, namely :
"Whether the Tribunal is correct in holding that the assessee is not a specified Hindu undivided family liable to be charged at the higher rate?"
is, therefore, in favour of the Revenue and against the assessee. There will be no order as to costs.