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.\u00a0 On 1st June, 1957, he had gifted away\u00a0\u00a0\u00a0\u00a0 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\u2019s 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\u00a0\u00a0\u00a0\u00a0 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.\u00a0 The assessee had incurred huge losses\u00a0 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\u2019s profit from\u00a0\u00a0 his own business for 1959-60 were Rs 14,324. The share income of the assessee\u2019s wife and minor children from the firm for the assessment year 1959-60 was\u00a0 \u00a0Rs. 24,592. The said income was included in the computation of the total income\u00a0 of the assessee under Section 16(3) of the Act for the assessment year 1959-60.\u00a0\u00a0 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<\/p>\n
\u00a0<\/p>\n
\u00a0<\/p>\n
wife and minor children. The \u2018AO\u2019 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.\u00a0\u00a0\u00a0\u00a0 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\u00a0\u00a0 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\u00a0 on the business of manufacture and\u00a0 sale of\u00a0 oil\u00a0 during\u00a0 the\u00a0 years under appeal, he was continuing to carry on the business of oil in\u00a0 general; that the\u00a0 firm did carry on the same business as has hitherto carried on by the assessee but there\u00a0\u00a0 was no connection between the assessee and the business carried on by the firm and they were two different entities and, as\u00a0 such, the assessee could not be said to be carrying on the business out of which the\u00a0 share income of\u00a0 the\u00a0 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\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 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\u2019s wife and minor children included in the assessee\u2019s 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\u00a0 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\u00a0 this case being aggrieved by High court order.<\/p>\n
\u00a0<\/p>\n
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\u00a0 the\u00a0 assessee in any\u00a0 year subsequent\u00a0 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?<\/p>\n
\u00a0<\/p>\n
I.T.R.\u00a0 597, <\/em><\/strong>this Court emphasised that a statutory provision must be so construed,\u00a0 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\u00a0and\u00a0 produce a\u00a0 rational construction. The\u00a0 task\u00a0 of\u00a0 interpretation of\u00a0 a \u00a0statutory<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n 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\u00a0 out of dictionary but remember that statutes always have some purpose or object\u00a0\u00a0 to accomplish and sympathetic and imaginative discovery is the surest guide to their meaning.<\/p>\n \u00a0<\/p>\n Dismissing the appeals of revenue and answering the question in assessee\u2019s favor and against the revenue, the court pertinently noted that \u201cSeveral 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\u00a0\u00a0\u00a0 the relevant provisions of the Act. It is manifest, as contended for on behalf of\u00a0\u00a0\u00a0\u00a0\u00a0the assessee, that the object of Section 16(3)(a)was to foil an individual\u2019s attempt\u00a0\u00a0 to reduce the incidence of tax by transferring his assets to his wife or minor child or by admitting his\u00a0 wife as a\u00a0 partner or\u00a0 his \u00a0minor child to\u00a0 the\u00a0 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\u201d\u00a0 In this connection, significant further dilation of the court narrates that \u201c\u2026. In the instant case, the business of the firm in which assessee\u2019s wife is a partner and to\u00a0\u00a0\u00a0\u00a0 the benefits of which his minor children had been admitted was a firm in which\u00a0\u00a0\u00a0\u00a0 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\u00a0\u00a0\u00a0 of Section 16(3) of the said Act was to restore the position which obtained before\u00a0\u00a0\u00a0\u00a0 the transfer, qua income. In other words, he urged that it was as if the transfer\u00a0\u00a0\u00a0\u00a0 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\u00a0\u00a0\u00a0 from business could be carried forward for six to eight years as the case may be,\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 to be set off against the business income of the assessee. Counsel urged that the object of\u00a0 the said section was not to\u00a0 punish the assessee for having transferred\u00a0 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..\u201d <\/em>Further\u00a0 discussing the revenue\u2019s case it was noted\u00a0 by the court that, \u201c\u2026.But <\/em>the question that arises here is whether against the inclusion of such income, loss suffered by the assessee in a previous year which\u00a0\u00a0\u00a0 was carried forward under Section 24(1) of the Act should be allowed to be set off\u00a0\u00a0\u00a0\u00a0 or not. The revenue contends that it cannot be. It lays emphasis on the fact that\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 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\u00a0\u00a0\u00a0\u00a0 the provisions of Section 24(2)(ii) which stipulates that loss to be carried forward<\/em><\/p>\n \u00a0<\/em><\/p>\n \u00a0<\/em><\/p>\n must be \u2018loss sustained by him in any other business, profession or vocation, it\u00a0 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\u00a0 him in that year\u2019. 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.\u00a0 But the problem here is that the business out of whose share income of\u00a0\u00a0 the wife or minor child is derived is no longer carried on by the assessee himself\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 in the subsequent year in\u00a0 which set off is\u00a0 being\u00a0 claimed. On behalf\u00a0 of the\u00a0 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.\u201d <\/em>After considering rival contentions, the court held that,\u00a0 \u201c\u2026the object\u00a0 of Section 16(3) of the Act which has to be read in conjunction with Section 24(2)\u00a0\u00a0\u00a0\u00a0in 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,\u00a0\u00a0\u00a0 the effect of the transfer of assets so far as computation of income of the assessee\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 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\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 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\u00a0\u00a0\u00a0\u00a0\u00a0 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\u00a0 made that these do\u00a0 not\u00a0 remain always so\u00a0 and if\u00a0\u00a0 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\u00a0 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\u00a0 how for various purposes the business from which profit is included or loss is set\u00a0\u00a0\u00a0\u00a0\u00a0 off is treated in various situations as assessee\u2019s income. The scheme of the Act as worked out has been noted before\u2026\u201d <\/em>and concluded that \u201c\u2026..Therefore, <\/em>where Section 16(3) of the Act\u00a0 operates, the\u00a0 profits or\u00a0 loss from a\u00a0 business of\u00a0 the\u00a0 wife\u00a0 or minor child included in the total income of the assessee should be treated as\u00a0\u00a0\u00a0\u00a0\u00a0 the profit or loss from a \u2018business carried on by him\u2019 for the purpose of carrying forward and set off such loss under Section 24(2) of the Act. On a consideration\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 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\u2019s 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\u00a0\u00a0 the question must be answered in the affirmative and in favour of the assessee.\u201d\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/em>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\u00a0\u00a0\u00a0 the manner indicated before, and if another construction ispossible apart from<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n 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\u00a0\u00a0 be kept\u00a0 in mind and then the same needs to be balanced with the object\/purpose\u00a0 of the stated provisions in consideration; It was very succinctly held that income would include loss.<\/p>\n Notably in this case, the court took special cognizance of 1961 Act\u00a0 provisions and mentioned that, \u201cWhen 1961 <\/em>Act was enacted, this was also not\u00a0 clarified.\u00a0 The requirement of Section 72 which replaced Section 24(2) of the Act proceeds substantially on previous basis.\u201d <\/em>(AY. 1959-1960 to 1961-1962) (CA Nos. 1596 to 1598 (NT) of 1973 CMP. No. 97 of 1975 dt. 29-8-1985)<\/p>\n Editorial : <\/em><\/strong>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\u00a0 can\u00a0 be\u00a0 found from apex\u00a0 court decision\u00a0 in case of Southern Motors case of 18\/01\/2017 in CA Nos 10955-10971 of 2016\u00a0 refer paragraph 30 of said decision. These principles are often relied by courts in dealing with provisions of taxing statute.<\/p>\n \u201cWhenever you have truth it must be given with love, or the message and the messenger will be rejected.\u201d<\/em><\/p>\n – Mahatma Gandhi<\/p>\n","protected":false},"excerpt":{"rendered":" S.64: Clubbing of income \u2013 Clubbing of the share of \u2018income\u2019 of wife and minor children – Income include loss- Loss can be clubbed and carried forward like income – 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 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- The scheme of the Act has to be considered in holistic manner 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 .[S. 70 , 71 , 72 , Income tax Act, 1922 , S. 16(3) 24(2) ]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-13374","post","type-post","status-publish","format-standard","hentry","category-income-tax-act"],"acf":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9S2Rw-3tI","jetpack-related-posts":[],"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13374","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/comments?post=13374"}],"version-history":[{"count":1,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13374\/revisions"}],"predecessor-version":[{"id":13375,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13374\/revisions\/13375"}],"wp:attachment":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/media?parent=13374"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/categories?post=13374"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/tags?post=13374"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Held<\/h3>\n