Income Tax Appellate Tribunal - Ahmedabad
Income Tax Officer vs Bharti Trust. (Ito V. Madhu Trust; Ito V. ... on 21 August, 1996
Equivalent citations: [1997]60ITD261(AHD)
ORDER
B.L. Chhibber, A.M.
1. The short but interesting question that arises in this group of appeals, common in all is whether the respondent-trusts are liable to tax at the maximum marginal rate under s. 161(1A) of the IT Act, 1961, on the total income remaining after set off of share of loss from the partnership concern wherein their trustees were partners in respective (sic) capacity or as the case may be, loss from the proprietary business of the trusts.
2. Kalindi Trust besides having interest income was partner with 8 per cent share in a registered firm under the name of style of M/s Sijcon Construction Co. and against the partnership income it showed nil income stating "Accounts not received".
Bharti Trust besides having interest income was partner with 10% share in a registered firm under the name and style of M/s Sijcon Construction Co. (Nadihi Project) and for asst. yr. 1985-86 it declared a loss of Rs. 2,488 against "partnership income" and for asst. yr. 1986-87 nil income was declared stating "account not received". Smita Trust was partner having 10 per cent share in a registered firm under the name of style of M/s Sijcon Construction Co. (Bilaspur Project) and for asst. yr. 1987-88 against the partnership income it declared nil income stating "Accounts not received".
Madhu Trust was running a proprietory business under the name and style of M/s Ganga Sales and Services and declared a net loss of Rs. 3,854 for asst. yr. 1987-88 under the head "business income".
3. The AO held that since the assessee-trust's income included profits and gains of business they were to be assessed at maximum marginal rate as per the provisions of s. 161(1A) of the Act. He accordingly subjected the assessee-trusts to maximum marginal rate.
4. Being aggrieved, the assessee-trusts appealed to the Dy. CIT(A). It was pleaded before the first appellate authority that although the assessee-trusts in earlier years were partners in same firms but during the years under appeal all those firms had been closed and there was no income from the partnership firms and hence there was no business income earned by the trusts. Agreeing with the arguments advanced before him by the learned counsel for the assessee, the Dy. CIT(A) held that since there was no business income earned by the trusts, the provisions of s. 161(1A) would not apply. He accordingly directed the AO not to tax the trusts at the maximum marginal rate.
5. Shri Sunil Agrawal, the learned Departmental Representative, submitted that the phrase "profits and gains of business", as appearing in s. 161(1A) covered loss from the business, whether proprietary or by way of share from the firm and as such tax was rightly charged at the maximum marginal rate on the whole of the income remaining after set off of loss.
6. Shri S. N. Divatia, the learned counsel for the assessee-trusts, strongly supported the orders of the Dy. CIT(A). He submitted that the phrase "profits and gains of business" does not include negative profits and gains of business and it is only when the said profits and gains are positive and remains after set off, if any, that tax is chargeable at maximum marginal rate. According to the learned counsel s. 161(1A) envisage two situations, namely, (i) where the only income of the trust may be profits and gains of the business; or (ii) in a second situation it may be one of the sources of income of the trust. This is because the said section contains the words "consists of" or "includes" which signify that profits and gains of business may be either only income or it may be one of various types of income. According to the learned counsel, if the interpretation canvassed by Revenue is accepted, it would mean that even when there is negative profits and gains as the sole item of the total income of the trust, the section would be applicable. The learned counsel submitted that the fallacy of the contention of the Revenue is apparent inasmuch as where the total income is loss even from business there cannot be any question of charging of tax much less at maximum marginal rate. The learned counsel further submitted that even in case where negative profits and gains of business are included in the total income of the trust, even then tax is not chargeable at maximum marginal rate because the total income is to be computed in the manner prescribed in that Act. Set off of loss as per provisions of ss. 70 to 80 is a stage which is part of this procedure. When this procedure is adopted for computing the total income, only amount of income after set off remains under a head as a part of total income. In other words, if the loss from the business is less that income under other heads of income, the procedure of set off of such loss would leave nothing from the business to be included in the total income and, therefore, tax cannot be levied at maximum marginal rate. In support of this contention, the learned counsel for the assessee-trusts relied upon the clarification regarding computation of tax in respect of long term capital gains under s. 112 made by CBDT, vide its Circular No. 721, dt. 13th Sept., 1995 wherein Board was called upon to interpret the phraseology namely "total income" and "includes" which is analogous to one under interpretation in the present appeals. The learned counsel further submitted that the Board is of the view that wherein there is no income under the head "capital gains" after set off of loss under other heads of income, there would be no tax. The learned counsel for the assessee-trusts, therefore, concluded that the AO was not justified in taxing the respondent trusts at the maximum marginal rate and the Dy. CIT(A) was justified in reversing the findings of the AO.
7. We have considered, the rival submissions and perused the facts on record. In order to appreciate the controversy it would be useful to reproduce hereunder the said s. 161(1A) as existing at the material time :
"(1A) Notwithstanding anything contained in sub-s. (1), where any income in respect of which the person mentioned in cl. (iv) of sub-s. (1) of s. 160 is liable as representative assessee consists of, or includes, profits and gains of business, tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate :
Provided that the provisions of this sub-section shall not apply where such profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him."
Sub-s. (1A) has been inserted in s. 161 by the Finance Act, 1984, w.e.f. 1st April, 1994. While explaining the scope and effect of this new sub-section the Departmental Circular No. 387, dt. 6th July, 1984 [(1984) 152 ITR (St) 17)] states in para 26.1 that -
"It has come to notice that taxpayers are increasingly conducting business through the medium of private trusts. Such arrangements are entered into for purposes of tax avoidance the main object being to avoid payment of the registered firm tax which would become payable if the business is carried on in partnership."
Thus, the object behind enacting this sub-section is to curb the practice of avoiding R. F. tax by carrying on business through the medium of private trust. In the cases before us the first three trusts, viz., Kalindi Trust, Bharti Trust and Smitha Trust were partners in the registered firms, the fact admitted by the assessee and it is clear that these trusts were deriving profits and gains of business. There is nothing on record to indicate that the firms in which these three trusts were partners stood dissolved formally or informally during the years under appeal. The fourth trust viz., Madhu Trust was admittedly having proprietary business though it suffered a loss from the proprietary business. In our view, the income includes negative income i.e., loss/negative profits. This view is supported by the decision of the Supreme Court in the case of CIT vs. J. H. Gotla (1985) 156 ITR 323 (SC).
In that case the share of income from the firm apportioned to minor child or wife was considered includible in the individual's total income and was regarded as business income in his hand. Therefore, the individual was held to be entitled to set off against such income his own business loss, both of the current year and that brought forward from the earlier years. The Supreme Court impliedly approved the view taken by the Karnataka High Court in the case of Dr. T. P. Kapadia vs. CIT (1973) 87 ITR 511 (Kar) and impliedly disapproved the view of the Gujarat High Court in the case of Dayalbhai Madhavji Vadera vs. CIT (1966) 60 ITR 551 (Guj). The interpretation of s. 161(1A) canvassed by Shri S. N. Divatia, the learned counsel for the assessee-trusts, is not acceptable because it is too literal and is not based on legal approach. The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. The language is at best an imperfect instrument for the expression of human thought and the intent of the legislative cannot be sacrificed for the language. We cannot do better than repeat the famous words of judge learned hand when he said :
"It is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing, be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning."
We would also like to quote the following two paragraphs from the judgment of the apex Court in the case of J. H. Gotla (supra) :
"If a strict and literal construction of the statute leads to an absurd result, i.e., a result not intended to be subserved by the object of the legislation ascertained from the scheme of the legislation, then, if another construction is possible apart from the strict literal construction, then that construction should be preferred to the strict literal construction.
Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the legislature, the Court might modify the language used by the legislature so as to achieve the intention of the legislature and produce a rational result."
8. In the light of above discussion, we hold that the assessee-trusts were deriving income from profits and gains of business and as such as per the provisions of s. 161(1A) tax is to be charged at the maximum marginal rate. We accordingly uphold the findings of the AO and reverse those of the Dy. CIT(A).
9. In the result, the appeals are allowed.