This is a reference under section 257 of the Income-tax Act, 1961 ("the Act") made by the Income-tax Appellate Tribunal, Madras-B Bench, in R. A. No. 187/MDS of 1975-76 arising out of ITA No. 1480/MDS of 1972-73 stating a case directly before this court and referring the following question of law for the opinion of this court
"Whether, on the facts and in the circumstances of the case, the assessee is entitled to carry forward to subsequent years not only his share but also the share of loss of his wife from the firm of Messrs. Dhanalakshmi Pictures, Vellore?"
The reference was made to this court directly on the view that, having regard to the difference of judicial opinion among the High Courts, recourse should be had to section 257 of the Act. The assessee, whose assessable status was that of an "individual", was a member of a firm of partners carrying on business in the name and style of Messrs. Dhanalakshmi Pictures, Vellore, in which he had a half share in the profits and losses, his wife, the other partner, having the other half share. For the assessment year 1968-69, the assessee filed a return declaring a loss of Rs. 30, 945 which was arrived at by including the assessee's own share of Rs. 15, 473 from the business of the firm and the share of loss of Rs. 15, 472 of the assessee's wife in the same firm. The assessee claimed that not only his share of the loss but also that of loss of his wife in the firm should be carried forward to the subsequent years for being set off against his future business income
The Income-tax Officer held that it was only where the assessee's wife made an income that such income would become includible in the total income of the assessee under section 64(1)(i) an that where there was only a loss in the case of the wife, such loss could not be set off against, or added to, the income or loss, as a the case may be, of the assessee. The assessment was concluded accordingly. In the first appeal preferred before the Appellate Assistant Commissioner of Income-tax, the appellate authority, following the diocesan of the Gujarat High Court in Dayalbhai Madhavji Vadera v. CIT [1966] 60 ITR 551, upheld the view of the Income-tax Officer and dismissed the appealIn the further appeal before the Income-tax Appellate Tribunal, the assessee succeeded, the Tribunal having placed reliance upon a decision of the Karnataka High Court in Dr. T. P. Kapadia v. CIT [1973] 87 ITR 511. The Revenue sought a reference to the High Court on a question of law. The Tribunal, being of the opinion that a question of law did arise, referred the question for the opinion of this court directly under section 257 of the Act, in view of the divergence of judicial opinion between the Karnataka and Gujarat High Courts on the question
Dr. Gauri Shanker, learned senior advocate for the Revenue, submitted that section 64(1)(i) of the Act, which corresponded to section 16(3)(i) of the 1922 Act, clearly envisaged an artificial liability and that though the expression "income" might, in certain circumstances, include "negative income" also, such a construction was excluded by the manifest intention in section 64(1)(i). The two expressions "income" and "shall be included" in section 64(1)(i), it was urged, clearly excluded any concept of such "negative income" as the idea was clearly one of adding rather than one of subtracting or set off. Dr. Gauri Shankar said that the provisions was intended to curb a tendency on the part of the taxpayer to endeavour to avoid or reduce liability to tax by distributing the sources of income to the spouse so that the income could not, in law, be said to be received by them, yet he would retain certain power over the source - and the income itself. But, he urged, where the statutory language was plain and unambiguous, there would arise no need to resort to any process of interpretation so as to give the statutory language a meaning to accord with its supposed intention. The plain meaning of a provision, it was said, must be given effect to, whatever the inequity or hardship that might be thought to result from its enforcement, as long as the meaning of the provision was plain and unambiguousSection 64(1)(i) is analogous to section 16(3)(a)(i) of the 1922 Act. Section 16(3) of the 1922 Act was introduced by the Amending Act IV of 1937, before which there was no provision at all for inclusion of the income of the wife in the total income of any individual. Apart from genuine cases where the source of income of the wife or the minor child were independent of the sources acquired from the father, cases of avoidance of tax by the device of creating partnerships with wives and minor children, as partners or persons admitted to the benefits of partnership respectively presented serious problems and were considered in the Income-tax Enquiry Report, 1936, which envisaged as "obvious remedy", for this state of affairs, so far as husband and wife are concerned, the aggregation of their incomes for assessment. However, the report recognised that such a course would involve the aggregation in a quite different class of cases, i.e., where the wife's income arose from sources unconnected with the husband. The report, therefore, said: "We recommend, therefore, that the incomes of a wife should be deemed to be, for income-tax purposes, the income of her husband, but that where the income of the wife is derived from her personal exertions and is unconnected with any business of her husband, her income from her personal exertions up to a certain limit, say Rs. 500, should not be so included". However, section 16(3), introduced by the Amending Act IV of 1937, adopted a slightly different legislative expedient
In CIT v. Manilal Dhanji [1962] 44 ITR 876, this court, referring to the object of section 16(3) of the 1922 Act, said (at page 881)
"... Then we come to sub-section (3). This sub-section aims at foiling an individual's attempt to avoid or reduce the incidence of tax by transferring his assets to his wife or minor child or admitting his wife as a partner or admitting his minor child to the benefits of partnership in a firm in which such individual is a partnerThe sub-section creates an artificial liability to tax and must be strictly construed."
Though the question referred, as formulated, refers to the carry forward of the share of loss of the wife, the preceding sequential, and indeed the core proposition is whether section 64(1)(i), which speaks of the includibility of the income of a spouse from the membership of the spouse in a firm in which the assessee is a partner, would also permit the share of the loss of the spouse to be set off against or accumulated with the income or the loss, as the case may be, of the husband and if the result in the hands of the husband is an unabsorbed loss, whether it could be carried forward if the other conditions for the set-off are satisfied. In the present case, that question of such carry forward of the loss arose in view of the fact that the assessee had also sustained a loss. The basic question is whether the expression "income" in section 64(1) includes "loss" also
Three considerations are relevant in answering the question. The first is the effect of the Circular No. 20 of 1944 of the Central Board of Revenue as to its understanding of the analogous provision in section 16(3)(a) of the 1922 Act. The relevant part of that circular says
"... The Board has reconsidered the question and has decided that, although this view may be tunable in law, the other and more equitable view is at least equally tenable that such loss should be treated as if it were a loss sustained by that individual. Thus, if the wife or minor child has a personal income of Rs. 5, 000 which is not includible in the individual's income and sustains a loss of Rs. 10, 000 from a source the income of which would be includible in the income of the individual, the loss should be set off against the income of the individual under section 24(1), and if not wholly set off should be carried forward under section 24(2)..."The second is Explanation 2 added to section 64 by the Finance Act, 1979, with effect from April 1, 1980. That Explanation says that: For the purpose of this section, 'income' includes 'loss'."
The third consideration is the decision of court in CIT v. J. H. Gotla [1985] 156 ITR 323 (SC), dealing with section 16(3) of the 1922 Act, which has examined and evaluated the first two interpretative criteria. It appears to us that the answer to the question referred is covered by the the pronouncement in Gotla's case [1985] 156 ITR 323 (SC) and must need be in the affirmative and against the Revenue
In Golta's case [1985] 156 ITR 323, this court said (at p. 340)
"... Therefore, where section 16(3) of the Act operates, the profit or loss from a business of the wife or minor child included in the total income of the assessee should be treated as the profit or loss from a 'business carried on by him' for the purpose of carrying forward and set off of such loss under section 24(2) of the Act
On a consideration of the scheme of the Act and the provisions therein as noted before, the share income of the wife and minor children included in the assessee's total income under section 16(3) of the Act should be regarded as business income derived from business carried on by the assessee and, in that view of the matter, the assessee is entitled to set off his loss carried forward from the previous years."
The provisions dealt with in Gotla's case [1985] 156 ITR 323 (SC) were, of course, the corresponding provisions of the 1922 Act. But the provisions of section 64(1)(i) are substantially the same and the exposition of the law under the relevant provisions of the 1922 Act must be held to govern the corresponding provision under the 1961 Act as well. Explanation 2 inserted in section 64 with effect from April 1, 1980, though not retrospective it its operation, serves as the legislative exposition of the import of section 64(1)(i). The Madhya Pradesh High Court in CIT v. Badri Prasad Agarwal [1983] 142 ITR 353 considered the effect of this legislative exposition and the learned Chief Justice, speaking for the Division Bench of the High Court, said (at pp. 355, 356)"Speaking generally, subsequent legislation cannot be used for construction of an earlier statute but if an enactment is really ambiguous, subsequent legislation can be used as a parliamentary exposition of the former (See Craies on Statute Law, 7th Edn., pp. 147 and 148). This principle was recently applied by the Supreme Court in construing section 15(b) of the Central Sales Tax Act, as it stood before its amendment by Act No. 61 of 1972, and the amendment introduced by this Amending Act, though not retrospective, was used as a parliamentary exposition of its intent contained in the unamended section (See Manickam and Co. v. State of Tamil Nadu [1977] 39 STC 12; AIR 1977 SC 518). The Explanation added in section 64 by the Finance Act, 1979, though not in terms retrospective, serves as a parliamentary exposition of the meaning of the word 'income' as used in the unamended section, for, that word, in the context of section 64, was really ambiguous and had given rise to diverse meanings."
This view of the Madhya Pradesh High Court has been referred to with approval by this court in Gotla's case [1985] 156 ITR 323
This construction of the provision also commended itself to the Direct Tax Law Committee 1978, which, in its final report, said
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r /> "The provisions for aggregating income of the spouse under clause (i) of section 64(1) has led to a dispute in regard to the treatment of losses which may fall to the share of the spouse from the partnership. The Gujarat High Court in Dayalbhai Madhavji Vadera v. CIT [1966] 60 ITR 551 has ruled that the section contemplates inclusion of income and, accordingly, the share of loss arising to the spouse cannot be set off against the total income of the other spouse. The Karnataka High Court in Kapadia v. CIT [1973] 87 ITR 511 has dissented from this view and has held that income in this section includes a loss. On general principles, income from membership in a firm would include a loss and the context of clause (i) of sub-section (1) does not warrant the contrary construction. The liability to assessment cannot alternate from year to year between the individual and the spouse depending on whether there is a profit or a loss..."We are in respectful agreement with the view taken in Gotla's case [1985] 156 ITR 323 (SC) and are not persuaded to take a different view which the acceptance of the submissions of Dr. Gauri Shanker would require. Accordingly, we answer the question referred in the affirmative and against the Revenue Question answered in the affirmative.
