1985 (8) TMI 5 - SC - Income Tax

Firm admitting children to profit: wife's and minors' shares under s.16(3) treated as business income; set-off of past losses allowed

Commissioner of Income-Tax, Bangalore Versus JH Gotla

SC held that where an assessee (a firm constituted by the wife with a third person) admitted the assessee's children to profit, the share of income of the ... Assessee firm was constituted by the wife with a third person, and children were admitted to the profits of the firm - The share income of the wife and minor children included in the assessee's total income under s. 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. Issues Involved:1. Entitlement to carry forward and set off losses against the share income of the assessee's wife and minor children under section 24(2) of the Indian Income-tax Act, 1922.2. Interpretation of section 16(3) of the Indian Income-tax Act, 1922.3. The applicability of the Gujarat High Court decision in Dayalbhai Madhavji Vadera v. CIT.4. The relevance of the Karnataka High Court decision in Kapadia v. CIT.5. The binding nature of the Central Board of Revenue's Circular No. 20 of 1944.Issue-wise Detailed Analysis:1. Entitlement to Carry Forward and Set Off Losses:The primary issue was whether the assessee could set off the losses carried forward from his individual business against the share income of his wife and minor children included in his total income under section 16(3) of the Act. The High Court and the Tribunal had differing views on this matter. The Tribunal denied the set-off, stating that the assessee was not carrying on the business from which the share income of his wife and minor children arose. However, the High Court, relying on the Karnataka High Court decision in Kapadia v. CIT, allowed the set-off, holding that the share income should be regarded as business income derived from a business carried on by the assessee.2. Interpretation of Section 16(3):Section 16(3) of the Act includes the income of the wife and minor children in the total income of the assessee. The Supreme Court noted that the purpose of this section was to prevent tax avoidance by transferring assets to family members. The Court emphasized that the income of the wife and minor children should be treated as the income of the assessee for the purpose of computing total income and allowing set-offs.3. Applicability of Gujarat High Court Decision:The Tribunal had relied on the Gujarat High Court decision in Dayalbhai Madhavji Vadera v. CIT, which held that the term 'income' in section 16(3) did not include negative income (loss). However, the Supreme Court distinguished the facts of the present case from the Gujarat decision, noting that the present case involved the inclusion of income from assets transferred by the assessee, not the inclusion of losses incurred by the wife or minor children.4. Relevance of Karnataka High Court Decision:The High Court's reliance on the Karnataka High Court decision in Kapadia v. CIT was significant. The Karnataka High Court had held that the share income of the wife and minor children included in the assessee's total income should be regarded as business income derived from a business carried on by the assessee. The Supreme Court agreed with this view, emphasizing that the purpose of section 16(3) was to counteract tax avoidance and should be construed to allow set-offs.5. Binding Nature of CBR Circular No. 20 of 1944:The Supreme Court also considered the Central Board of Revenue's Circular No. 20 of 1944, which allowed losses incurred by the wife or minor children to be set off against the income of the assessee. The Court noted that while the circular was not binding on the assessee, it was binding on the Revenue. The circular supported the view that losses should be treated as if they were sustained by the individual, thus allowing set-offs.Conclusion:The Supreme Court concluded that the share income of the wife and minor children included in the assessee's total income under section 16(3) should be regarded as business income derived from a business carried on by the assessee. Consequently, the assessee was entitled to set off his carried forward losses against this income. The appeals by the Revenue were dismissed, and the High Court's decision in favor of the assessee was upheld. The Court emphasized that the interpretation of tax laws should aim to avoid absurd results and ensure equity, aligning with the legislative intent to counteract tax avoidance.