My wife's and minor children's share income from a firm is clubbed into my total income. Can I set my own carried forward business loss against it, when I am not a partner in that firm?
Yes. The Supreme Court held that where the clubbing provision operates, the profit or loss from the business of the wife or minor child that is included in the assessee's total income must be treated as profit or loss from a business carried on by him for the purpose of carrying forward and setting off the loss. A strict literal reading would deny the set-off to the assessee, while the wife and children could not claim it either because the income is taxed in his hands, and Parliament cannot have intended that. The clubbing provision exists to counteract the transfer, not to punish the transferor.
Decided by the Supreme Court (Supreme Court of India - V.D. Tulzapurkar, Sabyasachi Mukharji and Rangnath Misra JJ; judgment by Sabyasachi Mukharji J) on 1985-08-29, reported as (1985) 156 ITR 323; 1985 AIR 1698; 1985 SCR Supp (2) 711; 1985 (4) SCC 343; 1985 SCALE (2) 723; (1985) Tax LR 1443. It bears on section 16(3) of the Indian Income-tax Act, 1922, section 24(2) of the Indian Income-tax Act, 1922, section 64, section 72 of the Income Tax Act 1961, in How Tax Law Is Read and Assessment & Scrutiny matters.
This is the case quoted for the proposition that a taxing statute is not to be read so literally as to defeat its own object. The formulation - that where a strict literal construction leads to a result not intended by the object of the legislation, another possible construction should be preferred, and that if a construction results in equity rather than injustice it should be preferred to the literal one - is cited constantly, including by the Supreme Court itself in later cases on wholly different sections. It is important to keep its setting in view: the Court was construing an artificial liability created only to counteract attempts to reduce tax by transferring assets, and it is that purpose which justified the departure from the literal words. On the clubbing provisions themselves it establishes that income there includes loss, that the included income is treated as the assessee's for the purposes of the Act, and that the identity of the business follows the income into his hands for set-off.
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The assessee was an individual who bought and sold groundnut oil, ran an oil mill and was also an abkari contractor. On 1 June 1957 he gifted part of the oil mill machinery, a solvent extraction plant, to his wife and three minor children. A firm was constituted by his wife and another person, to the profits of which his three minor sons were admitted; the assessee himself was not a partner. He leased the mill premises and the remaining machinery to that firm, which manufactured and sold groundnut oil, and he agreed to render management services to it for a commission on its purchases of oil cake and sales of decoiled cake. He continued his own small business in groundnut cake and oil and his abkari contracts. He had incurred heavy losses in his individual business in earlier years, and the loss carried forward from assessment year 1958-59 was Rs 7,88,734. His own business profit for 1959-60 was Rs 14,324, and the share income of his wife and minor children from the firm for that year was Rs 24,592, which was included in his total income under section 16(3) of the 1922 Act. He claimed set-off of the carried forward loss against both. The Income Tax Officer allowed it against his own profit but rejected it against the share income, and did the same for 1960-61 and 1961-62. The Appellate Assistant Commissioner allowed the set-off, treating the assessee as deemed to carry on the business from which the share income arose. The Tribunal reversed him: although the assessee still carried on the oil business generally and the firm carried on the same business he had carried on before, there was no connection between him and the firm, they were two different entities, and he could not be said to be carrying on the business from which the share income arose. On a reference the High Court, following the Karnataka decision in Dr T.P. Kapadia and declining to follow the Gujarat decision in Dayalbhai Madhavji Vadera, answered in the assessee's favour. The Revenue appealed by certificate.
The appeals were dismissed, the parties bearing their own costs. Where section 16(3) operates, the profit or loss from the business of the wife or minor child that is included in the assessee's total income must be treated as the profit or loss from a business carried on by him for the purposes of carrying forward and set-off under section 24(2). Accordingly the share income of the wife and minor children included in the assessee's total income is to be regarded as business income derived from a business carried on by him, and he is entitled to set off his loss carried forward from earlier years. The Court expressly found it unnecessary to decide whether the Board's Circular 20 of 1944 - which had directed that a loss of the wife or minor child, if it would have been includible as income, should be treated as the individual's own loss - was binding on the Revenue or a contemporaneous exposition of legislative intent, since that circular addressed a different problem: the set-off of a loss sustained by the wife or children, not the set-off of the assessee's own carried forward loss against income included from them.
The Court began with the conditions in section 24(2)(ii) of the 1922 Act as they then stood: the loss must be a business loss; the business in which it was sustained must continue to be carried on by the assessee in the year of set-off; and the business against whose profits the set-off is claimed must be carried on by him in that year. The second of those conditions was carried into the proviso to s.72(1)(i) of the 1961 Act and was omitted by the Finance Act, 1999 with effect from 1 April 2000; it is not a condition of set-off for AY 2000-01 or any later year. The case turned entirely on the third condition, which survives. The first two were satisfied on the Tribunal's own findings, and the case turned entirely on the third. It examined the object of section 16(3), which Manilal Dhanji had described as designed to foil an individual's attempt to avoid or reduce tax by transferring assets to his wife or minor child, creating an artificial liability to be strictly construed. It accepted the assessee's submission that the object was to restore the position that obtained before the transfer so far as income is concerned - not to punish him by denying allowances he would otherwise have had. It noted the surrounding law: income in these provisions includes loss, a point the Madhya Pradesh and Bombay High Courts had treated the later Explanation to section 64 as merely declaring; and the included income is treated as the assessee's for other purposes of the Act, since Kochammu Amma Peroke held the words his income in the return and penalty provisions cover it, and Marimuthu Nadar allowed earned income relief on it. The Madras decision in A.L. Srinivasan, which held that the wife's income keeps its identity and is included only for the purpose of taxing it in the husband's hands, was distinguished on the facts, the husband there having been a partner in the firm. The decisive step was the demonstration of absurdity. If the business of the wife or minor child is treated as one not carried on by the assessee, then where a large loss of theirs is included in his small income, the unabsorbed balance can be set off by nobody - not by him in a later year, and not by them, because the income is included in his. Following K.P. Verghese, that a provision must be construed so as to avoid absurdity and mischief, the Court held that where the plain literal interpretation produces a manifestly unjust result that the legislature could never have intended, the Court may modify the language to achieve the legislative intention and produce a rational construction, remembering Learned Hand's warning not to make a fortress out of the dictionary, since statutes have a purpose and sympathetic and imaginative discovery of it is the surest guide to their meaning.
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 injustice, then such construction should be preferred to the literal construction.
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Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court held that where the clubbing provision operates, the profit or loss from the business of the wife or minor child that is included in the assessee's total income must be treated as profit or loss from a business carried on by him for the purpose of carrying forward and setting off the loss. A strict literal reading would deny the set-off to the assessee, while the wife and children could not claim it either because the income is taxed in his hands, and Parliament cannot have intended that. The clubbing provision exists to counteract the transfer, not to punish the transferor. This was decided by the Supreme Court (Supreme Court of India - V.D. Tulzapurkar, Sabyasachi Mukharji and Rangnath Misra JJ; judgment by Sabyasachi Mukharji J) and bears on section 16(3) of the Indian Income-tax Act, 1922, section 24(2) of the Indian Income-tax Act, 1922, section 64, section 72 of the Income Tax Act 1961. It is reported as (1985) 156 ITR 323; 1985 AIR 1698; 1985 SCR Supp (2) 711; 1985 (4) SCC 343; 1985 SCALE (2) 723; (1985) Tax LR 1443. This is the case quoted for the proposition that a taxing statute is not to be read so literally as to defeat its own object. The formulation - that where a strict literal construction leads to a result not intended by the object of the legislation, another possible construction should be preferred, and that if a construction results in equity rather than injustice it should be preferred to the literal one - is cited constantly, including by the Supreme Court itself in later cases on wholly different sections. It is important to keep its setting in view: the Court was construing an artificial liability created only to counteract attempts to reduce tax by transferring assets, and it is that purpose which justified the departure from the literal words. On the clubbing provisions themselves it establishes that income there includes loss, that the included income is treated as the assessee's for the purposes of the Act, and that the identity of the business follows the income into his hands for set-off. If it applies to you, the first step is this: Where a literal reading of a deeming or anti-avoidance provision would produce a result the provision was never enacted to bring about, argue the object first and the words second, and identify precisely whose intention the literal reading would defeat.
The assessee was an individual who bought and sold groundnut oil, ran an oil mill and was also an abkari contractor. On 1 June 1957 he gifted part of the oil mill machinery, a solvent extraction plant, to his wife and three minor children. A firm was constituted by his wife and another person, to the profits of which his three minor sons were admitted; the assessee himself was not a partner. He leased the mill premises and the remaining machinery to that firm, which manufactured and sold groundnut oil, and he agreed to render management services to it for a commission on its purchases of oil cake and sales of decoiled cake. He continued his own small business in groundnut cake and oil and his abkari contracts. He had incurred heavy losses in his individual business in earlier years, and the loss carried forward from assessment year 1958-59 was Rs 7,88,734. His own business profit for 1959-60 was Rs 14,324, and the share income of his wife and minor children from the firm for that year was Rs 24,592, which was included in his total income under section 16(3) of the 1922 Act. He claimed set-off of the carried forward loss against both. The Income Tax Officer allowed it against his own profit but rejected it against the share income, and did the same for 1960-61 and 1961-62. The Appellate Assistant Commissioner allowed the set-off, treating the assessee as deemed to carry on the business from which the share income arose. The Tribunal reversed him: although the assessee still carried on the oil business generally and the firm carried on the same business he had carried on before, there was no connection between him and the firm, they were two different entities, and he could not be said to be carrying on the business from which the share income arose. On a reference the High Court, following the Karnataka decision in Dr T.P. Kapadia and declining to follow the Gujarat decision in Dayalbhai Madhavji Vadera, answered in the assessee's favour. The Revenue appealed by certificate. The matter was decided on 1985-08-29 by the Supreme Court (Supreme Court of India - V.D. Tulzapurkar, Sabyasachi Mukharji and Rangnath Misra JJ; judgment by Sabyasachi Mukharji J). On those facts the Supreme Court held as follows. The appeals were dismissed, the parties bearing their own costs. Where section 16(3) operates, the profit or loss from the business of the wife or minor child that is included in the assessee's total income must be treated as the profit or loss from a business carried on by him for the purposes of carrying forward and set-off under section 24(2). Accordingly the share income of the wife and minor children included in the assessee's total income is to be regarded as business income derived from a business carried on by him, and he is entitled to set off his loss carried forward from earlier years. The Court expressly found it unnecessary to decide whether the Board's Circular 20 of 1944 - which had directed that a loss of the wife or minor child, if it would have been includible as income, should be treated as the individual's own loss - was binding on the Revenue or a contemporaneous exposition of legislative intent, since that circular addressed a different problem: the set-off of a loss sustained by the wife or children, not the set-off of the assessee's own carried forward loss against income included from them.
The Court began with the conditions in section 24(2)(ii) of the 1922 Act as they then stood: the loss must be a business loss; the business in which it was sustained must continue to be carried on by the assessee in the year of set-off; and the business against whose profits the set-off is claimed must be carried on by him in that year. The second of those conditions was carried into the proviso to s.72(1)(i) of the 1961 Act and was omitted by the Finance Act, 1999 with effect from 1 April 2000; it is not a condition of set-off for AY 2000-01 or any later year. The case turned entirely on the third condition, which survives. The first two were satisfied on the Tribunal's own findings, and the case turned entirely on the third. It examined the object of section 16(3), which Manilal Dhanji had described as designed to foil an individual's attempt to avoid or reduce tax by transferring assets to his wife or minor child, creating an artificial liability to be strictly construed. It accepted the assessee's submission that the object was to restore the position that obtained before the transfer so far as income is concerned - not to punish him by denying allowances he would otherwise have had. It noted the surrounding law: income in these provisions includes loss, a point the Madhya Pradesh and Bombay High Courts had treated the later Explanation to section 64 as merely declaring; and the included income is treated as the assessee's for other purposes of the Act, since Kochammu Amma Peroke held the words his income in the return and penalty provisions cover it, and Marimuthu Nadar allowed earned income relief on it. The Madras decision in A.L. Srinivasan, which held that the wife's income keeps its identity and is included only for the purpose of taxing it in the husband's hands, was distinguished on the facts, the husband there having been a partner in the firm. The decisive step was the demonstration of absurdity. If the business of the wife or minor child is treated as one not carried on by the assessee, then where a large loss of theirs is included in his small income, the unabsorbed balance can be set off by nobody - not by him in a later year, and not by them, because the income is included in his. Following K.P. Verghese, that a provision must be construed so as to avoid absurdity and mischief, the Court held that where the plain literal interpretation produces a manifestly unjust result that the legislature could never have intended, the Court may modify the language to achieve the legislative intention and produce a rational construction, remembering Learned Hand's warning not to make a fortress out of the dictionary, since statutes have a purpose and sympathetic and imaginative discovery of it is the surest guide to their meaning. In the words reproduced by the source cited on this page: "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 injustice, then such construction should be preferred to the literal construction."
It was decided by the Supreme Court on 1985-08-29 and is reported as (1985) 156 ITR 323; 1985 AIR 1698; 1985 SCR Supp (2) 711; 1985 (4) SCC 343; 1985 SCALE (2) 723; (1985) Tax LR 1443. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 16(3) of the Indian Income-tax Act, 1922, section 24(2) of the Indian Income-tax Act, 1922, section 64, section 72, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were dismissed, the parties bearing their own costs. Where section 16(3) operates, the profit or loss from the business of the wife or minor child that is included in the assessee's total income must be treated as the profit or loss from a business carried on by him for the purposes of carrying forward and set-off under section 24(2). Accordingly the share income of the wife and minor children included in the assessee's total income is to be regarded as business income derived from a business carried on by him, and he is entitled to set off his loss carried forward from earlier years. The Court expressly found it unnecessary to decide whether the Board's Circular 20 of 1944 - which had directed that a loss of the wife or minor child, if it would have been includible as income, should be treated as the individual's own loss - was binding on the Revenue or a contemporaneous exposition of legislative intent, since that circular addressed a different problem: the set-off of a loss sustained by the wife or children, not the set-off of the assessee's own carried forward loss against income included from them. It arises in How Tax Law Is Read and Assessment & Scrutiny matters, on section 16(3) of the Indian Income-tax Act, 1922, section 24(2) of the Indian Income-tax Act, 1922, section 64, section 72 of the Income Tax Act 1961, and was decided by Supreme Court of India - V.D. Tulzapurkar, Sabyasachi Mukharji and Rangnath Misra JJ; judgment by Sabyasachi Mukharji J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show, as the assessee did here, that on the literal construction nobody gets the relief - neither the person taxed nor the person who earned it - because that asymmetry is what persuaded the Court. Keep the purpose narrow when you cite this case. It construes a provision designed to counteract a transfer, and it is weaker authority where the provision is a plain charging or computation rule. Do not build the argument on a Board circular. The Court expressly found it unnecessary to decide whether the 1944 circular was binding or a contemporaneous exposition.
Still good law. I read the facts, the whole of the concluding reasoning and the operative order; about 11,900 characters of the middle were not reproduced on the harvested page. I checked no later authority. The interpretive passage is repeatedly relied on by the Supreme Court itself - the harvested page's own citator note records later decisions distinguishing and referring to it, and it is quoted in Keshavji Ravji - and I know of nothing displacing it. The provisions construed are those of the 1922 Act; the Court notes that section 64 of the 1961 Act is similar except that it says spouse rather than wife, and that sections 70 to 72 correspond to section 24. A reader applying the holding to a current year must work from the present text of section 64 and section 72, and must note in particular that the same-business condition the Court recited under s.24(2)(ii) no longer exists: the proviso to s.72(1)(i) that carried it into the 1961 Act was omitted by the Finance Act, 1999 with effect from 1 April 2000, so from AY 2000-01 a brought-forward business loss is set off against the profits of any business or profession carried on by the assessee. What survives in s.72(1)(i) is only that some business or profession be carried on by him and assessable for that year — which is the condition this case actually turned on, and the one the holding is authority for. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
About 11,900 characters from the middle of the judgment are not reproduced on the harvested page. What is missing is the remainder of the text of section 16(3), the text of section 24 as it stood, and the earlier part of the Court's analysis of the two conditions for set-off; the text resumes mid-sentence in that analysis, and everything from there to the operative order is present. The judgment is also inconsistent about the date of the High Court order under appeal, the cause title giving 21 March 1973 and the opening paragraph 10 August 1973. The Court left open whether the Board's circulars here were binding or a contemporaneous exposition of legislative intent, and did not decide the separate question of setting off a loss sustained by the wife or minor child. The harvested page carries an editorial headnote, which is not used here. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed, the parties bearing their own costs. Where section 16(3) operates, the profit or loss from the business of the wife or minor child that is included in the assessee's total income must be treated as the profit or loss from a business carried on by him for the purposes of carrying forward and set-off under section 24(2). Accordingly the share income of the wife and minor children included in the assessee's total income is to be regarded as business income derived from a business carried on by him, and he is entitled to set off his loss carried forward from earlier years. The Court expressly found it unnecessary to decide whether the Board's Circular 20 of 1944 - which had directed that a loss of the wife or minor child, if it would have been includible as income, should be treated as the individual's own loss - was binding on the Revenue or a contemporaneous exposition of legislative intent, since that circular addressed a different problem: the set-off of a loss sustained by the wife or children, not the set-off of the assessee's own carried forward loss against income included from them.
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