Madhya Pradesh H.C : Whether, on the facts and in the circumstances of the case, and on a proper interpretation of s. 64 of the IT Act, 1961, the share of loss incurred by the wife of the assessee in the firm in which he is also a partner should be treated as the loss of the assessee and set off allowed against his income ?

Counsel Appeared

B. K. Rawat, for the Revenue : G. N. Purohit, for the Petitioner

G. P. SINGH, C.J.:

This is a reference made under s, 256(1) of the IT Act, 1961, referring for our answer the following question of law :

“Whether, on the facts and in the circumstances of the case, and on a proper interpretation of s. 64 of the IT Act, 1961, the share of loss incurred by the wife of the assessee in the firm in which he is also a partner should be treated as the loss of the assessee and set off allowed against his income ?”

The facts briefly stated are that the assessee and his wife, Smt. Raj Kunwar Rai, are partners in a firm carrying on business in the name of M/s Ganpat Pannalal, Harda. In the asst. yr. 1974- 75, the assessee claimed that the loss incurred by the wife in relation to, her share in the said partnership be deducted from the total income of the assessee. This claim of the assessee was not accepted by the ITO. The view of the ITO was confirmed by the AAC. The Tribunal, however, in further appeal, following the decision of the Mysore High Court in Dr. T.P. Kapadia vs. CIT (1973) 87 ITR 511 (Mys), allowed the loss of the wife to be deducted from the total income of the assessee.

Under s. 70 of the Act, where the net result for any assessment year in respect of any source falling under any head of income other than “Capital gains” is a loss, the assessee is entitled to have the amount of such loss set off against his income from any other source under the same head. Under s. 64, in computing the total income of any individual the income arising directly or indirectly to the spouse of such individual from the membership of the spouse, in a firm carrying on a business in which such individual is a partner has to be included. These provisions have given rise to two different interpretations. According to one view, s. 64 does not create any legal fiction and, therefore, the loss suffered by the wife in a partnership-firm of which the husband is a partner cannot, be deducted from the total income of the husband under s. 70. This view has been taken by the Gujarat and Madras High Courts in Dayalbhai Madhavji Vadera vs. CIT (1966) 60 ITR 551 (Guj) and CIT vs. A. L. Srinivasan (1977) 108 ITR 667 (Mad). The other view is that the word “income” in s. 64 must also include loss and, therefore, when the wife suffers loss in a partnership in which the husband is a partner, the loss so incurred has to be deducted in computing the total income of the husband. This view has been taken by the Mysore High Court in Dr. T. P. Kapadia vs. CIT (1973) 87 ITR 511 (Mys) and J. H. Gotla vs. CIT (1973) 91 ITR 531 (Mys). The view taken by the Mysore High Court was also adopted in a circular issued by the CBR which was in force from 1944 to 5th April, 1972. Reference in this connection may be made to CIT vs. B. M. Edward, India Sea Foods (1979) 119 ITR 334 (Ker), where the circular was discussed by a Full Bench of the Kerala High Court. The view taken by the Gujarat High Court is criticised by Kanga and Palkhivala in their commentary on the IT Act and the view taken by the Mysore High Court is commended. The following extract from Vol. 1(7th Edn.), p. 599, is relevant on this point : “In Dayalbhai Vadera vs. CIT (supra), the Gujarat High Court held that in this sub-section ‘income’ does not include a loss and, therefore, the share of loss apportioned to a spouse or minor child in a partnership cannot be included in the individual’s total income. It is submitted that the decision is incorrect. On general principles, income from membership in the firm would include a loss, and the context of cls. (i) to (iii) 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. Besides, in the absence of other income, the right to carry forward the loss in a running business would be completely lost if the individual is to be vicariously liable when there is a profit and the loss is to remain a dead loss in the assessment of the spouse or minor-child. In Kapadia vs. CIT (1973) 87 ITR 511(Ker), the Karnataka High Court, dissenting from the Gujarat decision, held that ‘income’ in this section includes a loss.”

It will be seen that there is a sharp divergence of opinion on the question of construction of the word “income” as it occurs in s. 64. According to one view it includes loss whereas according to the other view it does not include loss. It is a well-settled principle of interpretation of taxing laws that when two constructions are equally open, the one which is favourable to the taxpayer should be adopted. This is one reason for our preferring the construction adopted by the Mysore High Court. Another reason is that subsequent legislation has shown that the construction adopted by the Mysore High Court is the correct construction. By the Finance Act, 1979, Expln. 2 has been added in s. 64 which in specific terms says that for the purpose of the section “income” includes loss. 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. 147-148). This principle was recently applied by the Supreme Court in construing s. 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 & Co. vs. State of Tamil Nadu (1977) 39 STC 12; AIR 1977 SC 518]. The Explanation added in s. 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 s. 64, was really ambiguous and had given rise to diverse meanings.

For the reasons given above, we answer the question as follows :

6.The share of loss incurred by the wife of the assessee in the firm in which he is also a partner, should be deducted from the total income of the assessee.

7. There will be no order as to costs of this reference.

[Citation : 142 ITR 353]