Orissa High Court
Sri Suru Bhaskar Rao vs Commissioner Of Income Tax Orissa ... on 31 March, 2016
Author: Indrajit Mahanty
Bench: Indrajit Mahanty
THE HIGH COURT OF ORISSA : CUTTACK
INCOME TAX APPEAL NOS. 16, 17, 18, 19, 20 AND 21 OF
2005
In the matter of appeals under Section 260-A of the Income Tax
Act.
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In all the Appeals
Sri Suru Bhaskar Rao ...... Appellant
-Versus-
Commissioner of Income Tax, Orissa,
Bhubaneswar and another ...... Respondents
For Appellant : M/s. S. Ray, S. Dey & A. Mallick
For Respondents : Mr. S.K. Acharya,
Senior Standing Counsel,
Income Tax Department
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PRESENT:
THE HON'BLE MR. JUSTICE INDRAJIT MAHANTY
&
THE HON'BLE DR. JUSTICE D.P. CHOUDHURY
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Date of hearing- 15.03.2016 : Date of judgment: 31.03.2016
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Dr. D.P. Choudhury, J. The captioned Appeals arise out of a common
order dated 23.6.2004 passed by the learned Income Tax Appellate
tribunal, Cuttack Bench, Cuttack (hereinafter called "ITAT") in I.T.A.
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Nos. 277 to 280/CTK/2002 for the assessment years 1994-95 to
1997-98 and another common order dated 2.7.2004 in ITA Nos. 56
and 57 of 2004 for the assessment years 1992-93 and 1993-94. As
common questions of law involved in all the Appeals, they are
disposed of by this common order.
FACTS
2. The factual matrix leading to the case of the appellant is
that the appellant is the proprietor of a fabrication Unit in the name
and style of Jeypore Small Scale Industries at Jeypore being an
assessee under the status of individual. The appellant filed return in
the name of his daughter K. Sandhyarani under section 143(1)(a) of
the Income Tax Act, 1961 (hereinafter called "the Act") for the years
1992-93 to 1997-98 declaring the income for the respective years.
It is stated that Smt. K. Sadhyarani, who happens to be the
daughter of the appellant was deriving income from M/s. Parbati
Engineering Works till her marriage in 1994. After marriage she
could not give personal attention and executed power of attorney in
favour of the appellant to run the business. It is stated that Smt. K.
Sandhayarani got proprietorship of M/s. Parbati Engineering Works
from her mother Smt. S. Parbati having purchased same from her
mother on payment of Rs.10,000/- and executed a promissory note
of Rs.60,000/- as security in favour of her mother. It is averred that
M/s. Parbati Engineering Works is a separate small scale unit under
the Director of Industries and has got licence under the Sales Tax
department. It is alleged inter alia that the Assessing Officer without
affording reasonable opportunity of being heard reopened the
assessment under sections 144/147 of the Act by issuing notice
under section 148 of the Act to the appellant. The Assessing Officer
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passed ex parte reassessment order for the assessment years 1994-
1998 without serving statutory notice on the appellant. In the order
the Assessing Officer for no good reason clubbed the income of M/s.
Parbati Engineering Works along with the fabrication unit of the
appellant and demand was made for Rs.5,09,494/- for 1995-96,
Rs.6,42,146/- for 1994-95, Rs.12,18,714/- for 1997-98,
Rs.2,37,422/- for 1992-93, Rs.1,93,550/- for 1993-94 and
Rs.3,65,512/- for 1996-97. Against these orders the appellant filed
appeals before the Commissioner of Income Tax (Appeals) who
without examining any materials on record illegally observed that
the income declared by Smt. K. Sadhyarani belongs to the appellant
without understanding law thereof. Against that order the appellant
preferred appeals before the ITAT, Cuttack Bench, Cuttack
challenging the orders passed by the Commissioner of Income Tax.
The appellant did not appear before the ITAT on the date of hearing.
Thereafter without affording any further opportunity to the appellant
the ITAT disposed of the cases against the appellant by affirming
the orders passed by the authorities below. Then against the orders
of the ITAT the present appeals have been filed by the appellant
challenging same raising various contentions.
SUBMISIONS
3. Learned counsel for the appellant submitted that the
order of the ITAT are illegal and arbitrary for violation of natural
justice for being not followed the principles of audi alterm partem.
The ITAT has also committed error by confirming the order of the
First Appellate Authority in observing that the income of the major
daughter of the appellant also belongs to the income of the
appellant. He further submitted that the impugned order suffers
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from illegality by not considering the income of the daughter of the
appellant as separate income of the daughter of the appellant. The
ITAT has also erred in law by considering the property of the
daughter of the appellant as Benami property of the appellant. The
impugned order also suffers from illegality by doubting about the
promissory note executed by the daughter of the appellant as she
was minor by then.
4. It is submitted by learned counsel for the appellant that
the ITAT has failed to appreciate the facts of the case by not
affording reasonable opportunity of being heard to the appellant.
The ITAT has also failed to appreciate that the Assessing Officer
without following the statutory provisions of the Act has reopened
the case under section 148 of the Income Tax Act. He further
submitted that section 64 of the Act provides that income of an
individual will also include the income of spouse, minor daughter
etc. under certain circumstances as has been provided therein and
the impugned order passed by the Tribunal has not taken into
consideration properly about applicability of such statutory
provision. Section 64 (1-A) of the Act provides that income accruing
to a minor child shall be included in the total income of the
individual in particular situation, otherwise clubbing is not legally
permissible. But in the present case the authorities below without
considering such provision of law, clubbed the income of the
daughter of the appellant, who is major at the time of assessment
with the income of the appellant. It is submitted by learned counsel
for the appellant that the order passed by the ITAT being dehors to
the provisions of law should be set aside. Learned counsel for the
appellant raises the following questions of law for determination:
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(i) Whether in the facts and circumstances of the case, the
ITAT Cuttack Bench, Cuttack is legally correct in sustaining the
reasons of the Forums below and legally justified in clubbing the
income of Smt. K. Sadhyarani in the hands of her father, the
present appellant and whether such a conclusion does not run
contrary to law laid down in (190 ITR 336)?
(ii) Whether in the facts and circumstances of the case, the
clubbing of income of Smt. K. Sandhyarani at the hands of her
father, the present appellant is not contrary to the provision
contained U/s. 64 of the Income Tax Act, 1961 and therefore legally
unsustainable in the particular circumstances of the case?
(iii) Whether in the facts and circumstances of the case,
failure on the part of the ITAT, Cuttack Bench, Cuttack to decide on
each of the grounds of appeal taken by the appellant does not
vitiate the proceedings and render the order non-est in law?
(iv) Whether in the facts and circumstances of the case, the
appeal decided ex parte without ext ending reasonable opportunity
of being heard to the appellant, should not be held as arbitrary and
highly prejudicial, and should not be struck down as being in gross
violation of rules of natural justice?
5. Learned Senior Standing Counsel for the revenue
submitted that the impugned orders suffered from no illegality and
they are based on facts of the case. According to him, the daughter
of the appellant has been examined by the assessing Officer and in
her statement she categorically stated that M/s. Parbati Engineering
Works is owned by her father although purchased in her name, in
view of such submission there is no wrong in clubbing the income of
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M/s. Parbati Engineering Works, which is under the control of the
assessee, with the income of the appellant. He further submitted
that rightly the authorities below have appreciated the fact that the
daughter of the appellant being minor has acquired the property of
M/s. Parbati Engineering Works as Benami property of the appellant
inasmuch as minor has no capacity to contract under the Contract
Act and she had no income to acquire the property. He further
submitted that the story of execution of promissory note by the
daughter of the appellant towards the balance purchase cost of M/s.
Parbati Engineering Works is a void document as she was minor by
then. So he supported the impugned orders and submitted to
dismiss the appeals.
POINT FOR CONSIDERATION.
6. The points for consideration in these appeals as
formulated by the Court is "Whether in the facts & circumstances of
the case, it is legal and justified to club the income of a daughter at
the hands of her father and whether it is contrary to the provisions
of Section 64 of the Income Tax Act, 1961?"
DISCUSSIONS.
7. It is an admitted fact that the appellant is an assessee
under individual capacity. It is also an admitted fact that Smt. K.
Parbati is the wife of the appellant and Smt. K. Sandhyarani is the
daughter born out of their wedlock. It is also the admitted fact that
the appellant being assessee has derived his income in his
fabrication unit in the name of Jeypore Small Scale Industries.
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8. It is the claim of the appellant that M/s. Parbati
Engineering Works belonged to his wife and subsequently it has
been transferred by his wife to his daughter K. Sandhyarani. With
regard to the manner of purchase of such unit it is revealed from
the orders of assessment that daughter paid Rs.10,000/- and a
promissory note of Rs.60,000/- in favour of her mother as
consideration. It is revealed from the orders passed by the
authorities below including the Assessing Officer at the time of such
transaction K. Sandhyarani was minor. If she was minor it is
difficult to understand how she earned money to pay the same to
her mother. Moreover, when she was minor how she has got
capacity to execute promissory note in favour of her mother.
Section 11 of the Indian Contract Act reads follows:-
"11. Who are competent to contract.--Every person
is competent to contract who is of the age of majority
according to the law to which he is subject, and who is of
sound mind and is not disqualified from contracting by
any law to which he is subject. --Every person is
competent to contract who is of the age of majority
according to the law to which he is subject,1 and who is
of sound mind and is not disqualified from contracting by
any law to which he is subject."
9. From the aforesaid provision it is clear that no minor is
competent to enter into contract. To acquire competence to enter
into a contract K. Sandhyarani should have been age of majority as
required under section 11 of the Indian Contract Act. In the case of
Mathai Mathai v. Joseph Mary @ Marykkutty Joseph & ors.,
reported in (2015) 5 SCC 622, where Their Lordships observed at
paragraphs-9 and 10 as follows:-
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"9. The first point is required to be answered against
the appellant for the following reasons:-
It is an undisputed fact that Exh. A1 is the mortgage
deed executed by the uncle of the appellant and the
first respondent in favour of the deceased mother of
the appellant as collateral security towards the dowry
amount. At the time of execution and registration of the
document, it is an undisputed fact that the age of the
mortgagee, the deceased mother of the appellant was
15 years as mentioned in the mortgage deed itself.
Therefore, she had not attained the majority under the
Indian Majority Act, 1875. To acquire the competency
to enter into a contract with the uncle of both the
appellant and the first respondent the parties should
have been of age of majority as required under Section
11 of the Indian Contract Act, 1872. The aforesaid
aspect fell for interpretation before the Privy Council in
the case of Mohori Bibee v. Dharmodas Ghose[1],
wherein the Privy Council after interpretations of
relevant provisions of Section 11 of the Indian Contract
Act, 1872, has held that the contracting parties should
be competent to contract as per the above provision
and the minor's contract was held to be void as he
cannot be the mortgagor, the relevant paragraphs
referred to in the aforesaid decision are extracted
hereunder :-
"Looking at these sections their Lordships are satisfied
that the Act makes it essential that all contracting
parties should be "competent to contract," and
expressly provides that a person, who by reason of
infancy is incompetent to contract, cannot make a
contract within the meaning of the Act" In the later part
of the same paragraph, it is stated, "The question
whether a contract is void or voidable presupposes the
existence of a contract within the meaning of the Act,
and cannot arise in the case of an infant. Their
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Lordships are therefore of opinion that in the present
case there is not any such voidable contract as is dealt
with in section 64." Thus, it was held that a minor
cannot be a contracting party, as a minor is not
competent to contract as per Section 11 of the Indian
Contract Act. At this juncture, it is also necessary to
extract Sections 2 and 11 of the Indian Contract Act,
1872 which read as under:-
"2.Interpretation-clause. In this Act the following words
and expressions are used in the following senses,
unless a contrary intention appears from the context :-
(a) When one person signifies to another his willingness
to do or to abstain from doing anything, with a view to
obtaining the assent of that other to such act or
abstinence, he is said to make a proposal;
(b) When the person to whom the proposal is made
signifies his assent thereto, the proposal is said to be
accepted. A proposal, when accepted, becomes a
promise;
(c) The person making the proposal is called the
"promisor" and the person accepting the proposal is
called the "promisee";
(d) When, at the desire of the promisor, the promisee
or any other person has done or abstained from doing,
or does or abstains from doing, or promises to do or to
abstain from doing, something, such act or abstinence
or promise is called a consideration for the promise;
(e) Every promise and every set of promises, forming
the consideration for each other, is an agreement;
(f) Promises, which form the consideration or part of
the consideration for each other, are called reciprocal
promises;
(g) An agreement not enforceable by law is said to be
void;
(h) An agreement enforceable by law is a contract;
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(i) An agreement which is enforceable by law at the
option of one or more of the parties- thereto, but not at
the option of the other or others, is a voidable contract;
(j) A contract which ceases to be enforceable by law
becomes void when it ceases to be enforceable.
11. Who are competent to contract- Every person is
competent to contract who is of the age of majority
according to the law to which he is subject, and who is
of sound mind and is not disqualified from contracting
by any law to which he is subject." This important
factual and legal aspect has been conveniently ignored
by the authorities including the High Court while
adverting to Exh.A1, the mortgage deed. A strong
reliance was placed upon it by both the Land Tribunal
and the Appellate Authority in allowing the claim
application of the appellant holding that he is a deemed
tenant under Section 4A of the K.L.R. Act without
noticing the aforesaid relevant factual aspect of the
matter. Therefore, we have to hold that the mortgage
deed-Ex. A1 executed by the uncle of the appellant and
the first respondent, in favour of the deceased mother
of the appellant, is not a valid mortgage deed in respect
of the property covered in the said document for the
reason that the deceased mother at the time of
execution and registration of the document was a
minor, aged 15 years, and she was not represented by
her natural guardian to constitute the document as
valid as she has not attained majority according to law.
Many courts have held that a minor can be a
mortgagee as it is transfer of property in the interest of
the minor. We feel that this is an erroneous application
of the law keeping in mind the decision of the Privy
Council in Mohori Bibee's case (supra).
10. As per the Indian Contract Act, 1872 it is clearly
stated that for an agreement to become a contract, the
parties must be competent to contract, wherein age of
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majority is a condition for competency. A deed of
mortgage is a contract and we cannot hold that a
mortgage in the name of a minor is valid, simply
because it is in the interests of the minor unless she is
represented by her natural guardian or guardian
appointed by the court. The law cannot be read
differently for a minor who is a mortgagor and a minor
who is a mortgagee as there are rights and liabilities in
respect of the immovable property would flow out of
such a contract on both of them. Therefore, this Court
has to hold that the mortgage deed-Ex.A1 is void ab
initio in law and the appellant cannot claim any rights
under it. Accordingly, the first part of first point is
answered against the appellant."
10. With due respect it appears from the aforesaid decision
that the Hon'ble Apex Court has also followed the Privy Council in
the case of Mohori Bibee v. Dharmodas Ghose, reported in
(1903) ILR 30 Calc. 539 (P.C.). Thus, it is clear from the authorities
as stated above that any contract by the minor is void and thus he
is not competent to execute any promissory note which is also
agreement between her and her mother. Apart from this, such view
has been taken consistently taken by the authorities below. Since
we are in seisin of the Second Appeal and the authorities below
have consistently found fact that K. Sandhyarani was a minor while
executed the promissory note to succeed to M/s. Parbati
Engineering Works of her mother and there being no objection to
such findings by the appellant, we are constrained to observe that
such document is void one. Apart from this, question arises in mind
as to her capacity to earn money and pay Rs.10,000/- for
purchasing of M/s. Parbati Engineering Works from her mother. On
the other hand, it is clear from the orders of the authorities below
12
that K. Sandhyarani has admitted before the Assessing Officer that
the entire document of promissory note and other documents were
only prepared at the instance of her father who is the appellant and
she had no any knowledge of purchase of the property.
11. It is also available from the documents filed that K.
Sandhyarani has executed one power of attorney in favour of the
appellant to look after the affairs of M/s. Parbati Engineering Works
and take all necessary steps to file the Income Tax return etc. It is
revealed from orders of the Assessing Officer that while K.
Sandhyaani was examined, she admitted that she has no
knowledge about M/s. Parbati Engineering Works and such property
belongs to her fat her. She has also admitted before the Assessing
Officer that all documents are created b y appellant. So taking into
consideration of all these documents and statement of K.
Sandhdyarani, we are of the considered view that M/s. Parbati
Engineering Works is not owned by K. Sandhyarani. Moreover,
neither the appellant takes the plea nor document is proved to
show that such property is owned by his wife K. Parbati. On the
other hand, we are of the considered view that M/s. Parbati
Engineering Works is a Benami property of the appellant.
12. Section 64 of the Income Tax Act reads in the following
manner:-
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--
(i) [Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.]
(ii) to the spouse of such individual by way of salary,
commission, fees or any other form of remuneration
whether in cash or in kind from a concern in which such
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individual has a substantial interest:
Provided that nothing in this clause shall apply in relation
to any income arising to the spouse where the spouse
possesses technical or professional qualifications and the
income is solely attributable to the application of his or
her technical or professional knowledge and experience ;
xx xx xx
64 (1A) In computing the total income of any individual,
there shall be included all such income as arises or
accrues to his minor child, not being a minor child
suffering from any disability of the nature specified
in section 80U :
Provided that nothing contained in this sub-section shall
apply in respect of such income as arises or accrues to
the minor child on account of any--
(a) manual work done by him; or
(b) activity involving application of his skill, talent or
specialised knowledge and experience.
Explanation.--For the purposes of this sub-section, the
income of the minor child shall be included,--
(a) where the marriage of his parents subsists, in the
income of that parent whose total income (excluding the
income includible under this sub-section) is greater ; or
(b) where the marriage of his parents does not subsist, in
the income of that parent who maintains the minor child
in the previous year,
and where any such income is once included in the total
income of either parent, any such income arising in any
succeeding year shall not be included in the total income
of the other parent, unless the Assessing Officer is
satisfied, after giving that parent an opportunity of being
heard, that it is necessary so to do.
13. From the aforesaid provisions it is made clear that
Section 64 of the Act purportedly directs for computing income of
individual where income of wife be included. Section 64A of the Act
14
also enshrines about clubbing of income of minor child with income
of father under individual category if it is not derived from his
(minor) manual work or activity concerning minor's skill, talent and
likewise. So even if for argument shake it is considered that this
property of M/s. Parbati Engineering Works belongs to his wife or
minor daughter, income of such property will be clubbed with the
income derived from M/s. Jeypore Small Scale Industries of the
appellant.
14. In view of the analysis made above, we are of the view
that M/s.Parbati Engineering Works belongs to appellant and
income of such fabrication unit is income of the appellant. So, we
are of the considered view that income of M/s. Parbati Engineering
Works should be clubbed with the income of the appellant. Thus,
we do not find any infirmity with the impugned orders of the ITAT.
CONCLUSION.
15. Now adverting to points for consideration as
formulated, we are of considered view that facts and circumstances
of the case as discussed above do not purportedly show income
derived from M/s. Parbati Engineering Works is of K. Sandhyarani
or K. Parbati but it is income of appellant. So, the appellant being
assesee is liable to pay Income Tax on the income derived from
M/s. Parbati Engineering Works and question of income of his
daughter at the hand of appellant does not arise. Moreover, other
questions whether provisions of Section 64 of the Act is contrary to
above findings now becomes academic.
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In toto we are of the considered view that orders of the
ITAT in all these appeals being affirmed by us need no interference.
As such the Appeals being devoid of merit stand dismissed.
................................
Dr. D.P. Choudhury, J.
I. Mahanty, J.I agree.
................................ I. Mahanty, J.
ORISSA HIGH COURT : CUTTACK The 31st March, 2016/DNP