Facts

The assessee is an individual. He was carrying on business in the relevant assessment years in purchase and sale of ground-nut oil and was also running an oil mill. He was also an abkari contractor.  On 1st June, 1957, he had gifted away     a part of the oil mill machinery, viz., a solvent extraction plant, to his wife and three minor children. A firm was constituted by the assessee’s wife and another person to the profits of which the three minor sons of the assessee were also admitted. The mill premises as well as the remaining machinery of the assesses were leased out to this firm which carried on the business of the manufacture     and sale of ground-nut oil. The assessee himself continued to carry on business in purchase and sale of ground-nut cake and oil on a small scale. The assessee also continued his business as abkari contractor.  The assessee had incurred huge losses  in his individual business in the earlier years which were being carried forward from year to year upto the assessment year 1958-59. The loss carried forward from the assessment year 1958-59 was Rs. 7,88,734. The assessee’s profit from   his own business for 1959-60 were Rs 14,324. The share income of the assessee’s wife and minor children from the firm for the assessment year 1959-60 was   Rs. 24,592. The said income was included in the computation of the total income  of the assessee under Section 16(3) of the Act for the assessment year 1959-60.   The assessee claimed set off of the loss carried forward from the assessment year 1958-59 against the profits of his own business as also the shareincome of his

 

 

wife and minor children. The ‘AO’ rejected the claim for set off in so far as it related to the share income of his wife and minor children. Similar claims for set off were made in the assessment years 1960-61 and 1961-62 but were rejected.     On appeals preferred by the assessee, the Appellate Assistant Commissioner allowed the set off claimed on the ground that the assessee himself is deemed to   be carrying on the business from which the share income was derived by his wife and minor children. The revenue appealed to the Income Tax Appellate Tribunal, Hyderabad Bench. The Tribunal held that although the assessee was not carrying  on the business of manufacture and  sale of  oil  during  the  years under appeal, he was continuing to carry on the business of oil in  general; that the  firm did carry on the same business as has hitherto carried on by the assessee but there   was no connection between the assessee and the business carried on by the firm and they were two different entities and, as  such, the assessee could not be said to be carrying on the business out of which the  share income of  the  wife and minor children arose. Accordingly, it held that the assessee was not entitled under Section 24 (2) of the Act to claim set off of his losses against the income       of his wife and minor children. On appeal by assessee before High court, on a consideration of the scheme of the Act and the provisions there in referred to, the High Court was of the opinion that the share income of the assessee’s wife and minor children included in the assessee’s total income under Section 16(3) of the said Act should be regarded as business income derived from business carried on by the assessee and in that view of the matter the assessee was entitled to set off his loss carried forward from the previous year. Accordingly, the question referred  to in respect of these years was answered in the affirmative and in favour of the assessee by the High Court. Now revenue filed the appeals before Apex court in  this case being aggrieved by High court order.

 

Issue

The question involved in this case is, whether the income of the wife and/or minor children of the assessee from a partnership firm in which the wife is a partner and/or minor children have been admitted to the benefits of partnership carried on with the assets transferred by  the  assessee in any  year subsequent  to the year of transfer could be set off against any loss brought forward by the assessee inrespect of a business carried on by the assessee?

 

Views

In the case of K. P.  Verghese  v.  Income-Tax  Officer,  Ernakulam  and Another  131

I.T.R.  597, this Court emphasised that a statutory provision must be so construed,  if possible, that absurdity and mischief may be avoided. 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 construction. The  task  of  interpretation of  a  statutory

 

 

provision is an attempt to discover the intention of the Legislature from the language used. It is necessary to remember that language is at best an imperfect instrument for the expression of human intention. It is well to remember the warning administered by judge Learned Hand that one should not make fortress  out of dictionary but remember that statutes always have some purpose or object   to accomplish and sympathetic and imaginative discovery is the surest guide to their meaning.

 

Held

Dismissing the appeals of revenue and answering the question in assessee’s favor and against the revenue, the court pertinently noted that “Several propositions were canvassed before us on behalf of the assessee the main one being that the court should consider the purpose of the section for the proper construction of    the relevant provisions of the Act. It is manifest, as contended for on behalf of     the assessee, that the object of Section 16(3)(a)was to foil an individual’s attempt   to reduce the incidence of tax by transferring his assets to his wife or minor child or by admitting his  wife as a  partner or  his  minor child to  the  benefits or partnership in a firm in which he was a partner by transferring the assets directly or indirectly to them otherwise than for adequate consideration”  In this connection, significant further dilation of the court narrates that “…. In the instant case, the business of the firm in which assessee’s wife is a partner and to     the benefits of which his minor children had been admitted was a firm in which     the assessee himself was not a partner and as such that business was not being carried on by the assessee. Counsel for the assessee contended that the real object    of Section 16(3) of the said Act was to restore the position which obtained before     the transfer, qua income. In other words, he urged that it was as if the transfer     had not taken place. It was his submission that if the transfer had not taken place, the income of the wife and the minor children from the assets transferred viz., machinery in this case, would be the income of the assessee. In other words, it would be income from his business if the transfer was ignored. In that case loss    from business could be carried forward for six to eight years as the case may be,       to be set off against the business income of the assessee. Counsel urged that the object of  the said section was not to  punish the assessee for having transferred  his assets to his wife or minor children by denying any allowance, concession, deduction, etc. to which he or others would otherwise be entitled to. There is substance in this contention..” Further  discussing the revenue’s case it was noted  by the court that, “….But the question that arises here is whether against the inclusion of such income, loss suffered by the assessee in a previous year which    was carried forward under Section 24(1) of the Act should be allowed to be set off     or not. The revenue contends that it cannot be. It lays emphasis on the fact that       set off for the carried forward loss is permitted only by Section 24(1) of the Act and there should be strict literal construction of Section 24(2) and as such in view of     the provisions of Section 24(2)(ii) which stipulates that loss to be carried forward

 

 

must be ‘loss sustained by him in any other business, profession or vocation, it  shall be set off against the profits and gains, if any, of any business, profession or vocation carried on by him in that year; provided that the business, profession or vocation in which the loss was originally sustained continued to be carried on by  him in that year’. Therefore, it is required that the business, profession or vocation against profits of which the set off is claimed must be carried on by the assessee in that year.  But the problem here is that the business out of whose share income of   the wife or minor child is derived is no longer carried on by the assessee himself       in the subsequent year in  which set off is  being  claimed. On behalf  of the  revenue it was emphasised that this requirement is to be strictly followed… It was further stressed on behalf of the revenue that equity has no place in interpreting fiscal legislation.” After considering rival contentions, the court held that,  “…the object  of Section 16(3) of the Act which has to be read in conjunction with Section 24(2)    in this case for the present purpose. If the purpose of a particular provision is easily discernible from the whole scheme of the Act which in this case is, to counteract,    the effect of the transfer of assets so far as computation of income of the assessee       is concerned then bearing that purpose in mind, we should find out the intention from the language used by the Legislature and if strict literal construction leads       to an absurd result i.e. result not intended to be subserved by the object of the legislation found out in the manner indicated before, and if another construction      is possible apart from strict literal construction then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be  made that these do  not  remain always so  and if   a construction results in equity rather than in in-justice, then such construction should be preferred to the literal construction. Furthermore, in the instant case we  are dealing with an artificial liability created for counteracting the effect only of attempts by the assessee to reduce tax liability by transfer. It has also been noted  how for various purposes the business from which profit is included or loss is set      off is treated in various situations as assessee’s income. The scheme of the Act as worked out has been noted before…” and concluded that “…..Therefore, where Section 16(3) of the Act  operates, the  profits 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 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. In the premises   the question must be answered in the affirmative and in favour of the assessee.”       In this process the court laid emphasis on some principle of interpretation of statute; firstly that if strict literal construction leads to an absurd result i.e. result not intended to be subserved by the object of the legislation found out in    the manner indicated before, and if another construction ispossible apart from

 

 

strict literal construction then that construction should be preferred to the strict literal construction, secondly that though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in in-justice, then such construction should be preferred to the literal construction. Thirdly that whole scheme of the Act has to   be kept  in mind and then the same needs to be balanced with the object/purpose  of the stated provisions in consideration; It was very succinctly held that income would include loss.

Notably in this case, the court took special cognizance of 1961 Act  provisions and mentioned that, “When 1961 Act was enacted, this was also not  clarified.  The requirement of Section 72 which replaced Section 24(2) of the Act proceeds substantially on previous basis.” (AY. 1959-1960 to 1961-1962) (CA Nos. 1596 to 1598 (NT) of 1973 CMP. No. 97 of 1975 dt. 29-8-1985)

Editorial : The principles of interpretation as laid down in this case are of eternal value and hold the field today also, speciallyon equity and stranger aspect to which one recent illustration  can  be  found from apex  court decision  in case of Southern Motors case of 18/01/2017 in CA Nos 10955-10971 of 2016  refer paragraph 30 of said decision. These principles are often relied by courts in dealing with provisions of taxing statute.

“Whenever you have truth it must be given with love, or the message and the messenger will be rejected.”

– Mahatma Gandhi