Documente Academic
Documente Profesional
Documente Cultură
AND
Hon'ble Judges/Coram:
Dr. B.P. Saraf and U.T. Shah, JJ.
Counsels:
For Appellant/Petitioner/Plaintiff: Dr. V. Balasubramaniam and Soli Dastur, Advs.
Case Referred:
CIT v. Purushotam Gangadhar Bhende, (1977) 106 ITR 932 (Bom)
Case Note:
JUDGMENT
1. This is a consolidated reference under section 256(1) of the Income Tax Act, 1961,
made by the Income Tax Appellate Tribunal, ("the Tribunal") on eight reference
applications, four by the Department and four by the assessee, as they involve
common facts and questions of law and arise out of a consolidated order of the
Tribunal. The questions of law referred by the Tribunal are as follows :
(2) Whether, on the facts and in the circumstances of the case, the
Appellate Tribunal is right in holding that the dividend income received by
the communion of interest of husband and wife marred under the
Portuguese Civil Code is liable for assessments in equal shares in the hands
of each of the consorts without taxing it in the hands of the body of
individuals ?
(3) Whether, on the facts and in the circumstances of the case, the
Appellate Tribunal is right in holding that the entire managing director's
remuneration and perquisites have to be assessed in the hands of Mr. Modu
Timblo, individual, and not one-half of the same ?"
2. This reference relates to the assessment years 1973-74 and 1974-75. For these two
years, the assessments were made by the Income Tax Officer on the "body of
individuals" consisting of Mr. Modu Timblo and his wife, Mrs. Sushilabai M. Timblo, and
also on Mr. Modu Timblo as "individual". There were six appeals before the Tribunal for
these two years - two by the Income Tax Officer against the Appellate Assistant
Commissioner's orders in the case of Mr. Modu Timblo, individual, and out of the other
four appeals, two were by Mr. Modu Timblo, individual, in respect of his individual
assessments, and two in respect of the assessments made on the body of individuals
consisting of Mr. Modu Timblo and his wife. These appeals were disposed of by the
Tribunal by a consolidated order. Against the above consolidated order of the Tribunal
in the above appeals, there were four reference applications by the Commissioner, two
each by Modu Timblo, individual, and Modu Timblo, representing the body of
individuals. The reference applications were filed by the Commissioner in respect of the
Tribunal's order in the case of the body of individuals and in the case of Modu Timblo,
individual. On all these applications of the Commissioner as well as the assessee, this
consolidated reference has been made by the Tribunal.
3. In order to appreciate the questions of law referred to us, it is necessary to set out
the relevant facts of the case which have given rise to the two sets of assessments,
one on Modu Timblo, individual, and another on the body of individuals ("B.O. I.")
comprising Modu Timblo and his wife. Mr. Modu Timblo and his wife, Sushilabai M.
Timblo, were Portuguese citizens before the liberation of Goa and were married
according to the custom of the realm. They were governed by the Portuguese Civil
Code enacted in 1867 which was amended in 1930. During the accounting periods
relevant to the assessment years 1973-74 and 1974-75, Mr. and Mrs. Modu Timblo
(hereinafter called the "communion" for the sake of convenience), derived income from
business run under the name and style of Messrs. Margao Maritime as well as income
by way of share in the profits of two partnership firms, viz., Messrs. Auto Universal,
Margao, and Messrs. Nav Gomant Prakashan, Margao, and also derived income from
interest from banks, dividend on shares and income from letting of property to one
Gurudas Timblo. So far as these sources of income were concerned, it was common
ground that the income from these sources were of Mr. and Mrs. Modu Timblo in which
each had an equal share. Apart from income from the above sources, Mr. Modu Timblo
also earned remuneration as well as perquisites from a private limited company as its
managing director.
(ii) Share of profit from Messrs. Auto Universal and Messrs. Nav Gomant
Prakashan;
5. Two assessments were also made on Mr. Modu Timblo as an individual for the above
two years and in these assessments, in addition to remuneration from the private
limited company, the Income Tax Officer included, as a protective measure, income
which was computed in the assessment of the body of individuals as its income.
7. The Appellate Assistant Commissioner did not accept the contention that the
communion could not be assessed in the status of "body of individuals" in respect of
the income from the communion property. With regard to the remuneration from the
private limited company, the Appellate Assistant Commissioner held that the
remuneration was to be assessed fully in the individual assessment of Mr. Modu
Timblo. In the above circumstances, the Appellate Assistant Commissioner dismissed
the appeals filed by the body of the individuals and partly allowed the appeals filed by
Modu Timblo in his status as an individual - the relief being that the income from the
communion properties was excluded from the individual assessments of Modu Timblo.
8. Both the Revenue as well as the assessee, viz., body of individuals consisting of Mr.
Modu Timblo and his wife and Mr. Modu Timblo as individual went in appeal to the
Income Tax Appellate Tribunal ("the Tribunal") against the orders of the Appellate
Assistant Commissioner. All these appeals were disposed of by the Tribunal by its
consolidated order dated March 31, 1977. The main contention on behalf of the
communion before the Tribunal was that there could be no assessment in the status of
body of individuals while the main contention of Mr. Modu Timblo as individual was that
9. The Tribunal considered the aforesaid rival submissions of the assessee as well as
the Revenue in the light of the decision of this court in CIT v. Purushotam Gangadhar
Bhende MANU/MH/0037/1974 : [1977]106ITR932(Bom) and held that the High Court
in the above case was mainly concerned with the legal position of the communion with
regard to its "income from property" and in that context on a detailed examination of
the various articles of the Portuguese Civil Code, it was held that section 26 of the
Income Tax Act, 1961, applied to the communion in regard to its income from house
property. The Tribunal also noticed that the High Court did not examine the legal
position whether in regard to communion's income falling under heads other than
"income from house property", the status of the communion should be body of
individuals or not. According to the Tribunal, the High Court in the above case had
clearly opined that the communion of the husband and wife was not akin to a Hindu
undivided family under the Mitakshara system of Hindu law nor to a "firm" as defined
in the Indian Partnership Act and that it was akin to a tenancy-in-common or to the
English coparcenary having a unit of title, interest and possession. The Tribunal also
considered the decision of the Supreme Court in CIT v. Indira Balkrishna
MANU/SC/0181/1960 : [1960]39ITR546(SC) , as well as the decision of the Andhra
Pradesh High Court in Deccan Wine and General Stores v. CIT MANU/AP/0165/1971 :
[1977]106ITR111(AP) and of the Gujarat High Court in CIT v. Harivadan Tribhovandas
MANU/GJ/0043/1973 : [1977]106ITR494(Guj) and on an elaborate discussion of the
principles laid down in the above judgments found that in order to bring the
communion of husband and wife within the definition of "body of individuals" under the
Income Tax Act, the following two tests should be satisfied :
(2) One or more of the members of such a combination must carry on some
activity with the object of earning income or one or more member must
produce or help to produce income for the benefit of all.
10. The Tribunal also observed that from the above decisions it was clear that : (i) a
combination of individuals who merely received income jointly without anything further
as in the case of co-heirs inheriting shares or securities will not be a body of
individuals, and (ii) "body of individuals" and "association of persons" do not conceive
an identical person. In the light of the above observation based on the decision of the
Supreme Court and the various High Courts, the Tribunal held that in order that the
communion of the husband and wife constitute a body of individuals for the purposes
of the Income Tax Act, it would be necessary that the communion of husband and wife
marred under the Portuguese Civil Code satisfies the two essential tests mentioned
above with reference to each head of income enumerated in section 14 in respect of
which it is sought to be assessed in what status. The Tribunal then proceeded to
examine how far these tests were satisfied in respect of the different sources of income
concerned. The Tribunal summed up its findings as follows :
"(A) Salaries : This would be assessed in the hands of the individual earning
the salary;
(D) (i) Income from business : Income from any business carried on by the
communion or on its behalf will be the income of the body of individuals and
will have to be assessed in that status.
(ii) Income from profession : Income from profession will have to be fully
assessed in the hands of the individual who earns the professional income
as in the case of salary. It noted, however, that there might be exceptions
when there is a combined effort in the nature of business or profession.
(E) Capital gains : The assessability of capital gains in the hands of the body
of individuals or the individuals constituting the communion will depend
upon the facts of each case;
(F) Income from other sources : Different types of income under this head
may have to be assessed differently on the facts of each case."
11. In the light of the above conclusions, the Tribunal held that in the case of
communion of the husband and wife under the Portuguese Civil Code, by and large
income from business and some of the sources such as hiring of machinery, plant, etc.,
falling under the head "Income from other sources" would be that of the body of
individuals, income falling under the other heads, "Interest on securities", "Profits and
gains of profession", "Capital gains" and from other sources such as "Dividends",
"Interest on deposits", etc., will be joint income of the two spouses and will have to be
assessed in their hands in equal shares. The Tribunal did not agree with the contention
raised on behalf of the assessee that even if the income was treated as accruing or
arising to the communion as "a body of individuals", in view of the rights of the
husband and wife to the property and income there will be a diversion of income by
overriding title. In that view of the matter, the Tribunal held that income from business
in the name of Messrs. Marmugao Maritime and the income from the two partnership
firms, namely, Messrs. Auto Universal and Messrs. Nav Gomant Prakashan, should be
assessed in the status of "body of individuals". Similarly, interest from banks on
current accounts and saving bank accounts maintained in the course of the business
carried on by the communion should be assessed as income of the body of individuals.
Income from dividends was, however, held to be assessable equally in the hands of the
two spouses in their individual assessments. With regard to the income from property
let out to Gurudas Timblo, which was derived from letting out of godowns and office
premises, the Tribunal held that it was income from house property and the provisions
of section 26 will apply as held by this court in CIT v. Purushotam Gangadhar Bhende
MANU/MH/0037/1974 : [1977]106ITR932(Bom) . It also held that the remuneration
from the private limited company, viz., Sociedade De Fomento Industrial Private Ltd.,
including the perquisite of Rs. 3,000 earned by Mr. Modu Timblo, should be assessed
fully in the hands of Mr. Modu Timblo, individually.
12. As stated above, both the assessee in his status as an individual as well as body of
individuals and the Revenue applied for reference under section 256(1) of the Act.
13. We have heard learned counsel for both the parties at length.
14. The contentions of Shri Dastur, learned counsel for the assessee, can be summed
up as under :
(i) The Portuguese Civil and Commercial Codes do not create a body of
individuals comprising husband and wife, in whose hands any income may
be assessed because the essential requirements to constitute a body of
individuals are absent in the case of a communion of husband and wife.
Reliance was placed in support of this submission on the decisions of this
court in CIT v. Purushotam Gangadhar Bhende MANU/MH/0037/1974 :
[1977]106ITR932(Bom) , CIT v. Y. S. Desale MANU/MH/0120/1982 : [1982]
137ITR117(Bom) , CGT v. Aleixo P. Velho MANU/MH/0066/1982 : [1983]
143ITR372(Bom) and of the Gujarat High Court in CIT v. Harivadan
Tribhovandas MANU/GJ/0043/1973 : [1977]106ITR494(Guj) . The fact that
the management of the property or the business, after the marriage, is in
the hands of one of the parties, i.e., the husband or the wife does not in any
way affect the above position. (ii) This court having held in Purushotam
Gangadhar Bhende's case MANU/MH/0037/1974 : [1977]106ITR932(Bom)
in Aleixo P. Velho's case MANU/MH/0066/1982 : [1983]143ITR372(Bom)
that the ownership of all property existing and future vested in both the
husband and wife in half shares and having directed the assessment of the
income from house property in equal shares in the individual assessments of
husband and wife, there can be no body of individuals of husband and wife.
(iii) Though the decision of this court in CIT v. Purushotam Gangadhar
Bhende MANU/MH/0037/1974 : [1977]106ITR932(Bom) was rendered in a
case where the dispute related to assessment of income from "house
property" which was decided with reference to section 26 of the Act, the
ratio thereof will apply to income falling under all heads (even though
section 26 did not apply thereto). Reliance was placed in support of this
contention on a decision of this court in Addl. CIT v. Valentino F. Pinto,
Mapuca MANU/MH/0065/1983 : [1984]150ITR408(Bom) . (iv) That on a
correct reading of the rights of the husband and wife under the Portuguese
Civil Code and the decisions of this court, even the salary income earned by
any of the members of the communion, i.e., husband or wife, would accrue
or arise in equal shares to each of them inasmuch as salary is also property.
(v) Even assuming that the entire amount of income from any source arises
either to the husband or the wife, by virtue of the Code a half share of such
income will get diverted by overriding title or a charge by operation of law to
the other spouse and, as such, only half of the income can be assessed in
the hands of the husband or wife to whom it accrued.
15. Learned counsel also submitted that the question of diversion of income from the
husband to the wife or vice versa does not arise in this case.
16. As regards the decision of this court in Addl. CIT v. Valentino F. Pinto, Mapuca
MANU/MH/0065/1983 : [1984]150ITR408(Bom) , the submission of learned counsel
for the Revenue is that the said decision has been given per incuriam.
17. We have carefully considered the rival submissions of learned counsel for the
parties. We have also perused the relevant provisions of the Portuguese Civil Code. We
do not propose to deal with the various provisions of the said Code at length because
all those have been elaborately discussed by this court in Purushotam Gangadhar
Bhende's case MANU/MH/0037/1974 : [1977]106ITR932(Bom) and Aleixo P. Velho's
case MANU/MH/0066/1982 : [1983]143ITR372(Bom) . The legal propositions that
emerge from the various provisions of the Portuguese Civil code as well as article 10 of
the Commercial Code have been summed up in Purushotam Gangadhar Bhende's case
MANU/MH/0037/1974 : [1977]106ITR932(Bom) :
(ii) Proposition No. 1 applies to the corpus as well as the income of all
communion property, immovable as well as movable. The unique paragraph
(proviso) to article 1109 lays down that even the income of property
excluded from the communion is communion property. A fortiori the income
from the communion property itself must be communion property;
(iii) Under articles 1117 and 1189, the husband has only a right of
management, but even that right is not an absolute right so as to amount to
'ownership' of the income, in view of the provisions of articles 1118, 1119,
1191 and 1219. Moreover, under the very articles 1117 and 1189, even the
wife can be in management in certain contingencies, her right being
similarly fettered under the provisions of article 1193;
18. The above legal propositions have been reiterated by this court in Aleixo P. Velho's
case MANU/MH/0066/1982 : [1983]143ITR372(Bom) .
20. The same is the ratio of the decision of this court in CGT v. Aleixo P. Velho
MANU/MH/0066/1982 : [1983]143ITR372(Bom) . In this case also, a gift of movable
and immovable properties was made by an individual and his wife married under the
Portuguese Civil Code. It was held that when the husband and wife, who had been
assessed as a body of individuals, made the gifts, each of them gifted only his and her
respective half share in the properties and hence no assessment could be made on
them on the footing of their having made the gift as a body of individuals. This decision
given in the context of the Gift-tax Act does not in any way affect the foundation of the
judgment that the communion is a body of individuals.
21. Before we proceed to decide the status of the assessee vis-a-vis the income
assessed under each head of income, it may be expedient to mention the decision of
the Supreme Court in CIT v. Indira Balkrishna MANU/SC/0181/1960 : [1960]39ITR546
(SC) . This was a case under the Indian Income Tax Act, 1922, where there was no
taxable entity like "a body of individuals". It was only "an association of persons".
Interpreting the expression "association of persons" as used in section 3 of the Income
Tax Act, it was held by the Supreme Court that the word "associate" means "to join in
common purpose, or to join in an action". Therefore, "association of persons" means
an association in which two or more persons join in common purpose or common
action, and as the words occur in a section which imposes a tax on income, the
association must be one the object of which is to produce income, profits or gains.
Thus the above decision was based on the meaning of the word "association".
22. The expression "person" has now been defined in section 2(31) of the Income Tax
Act, 1961, which included "an association of persons or a body of individuals, whether
incorporated or not". The Legislature had definitely some purpose in mind while
specifically including a body of individuals in the category of persons along with
"association of persons". It will not be proper to say that "body of individuals" must be
given the same meaning attributed to "association of persons" by the Supreme Court
in Indira Balkrishna's case MANU/SC/0181/1960 : [1960]39ITR546(SC) . Doing so will
render the entire exercise of defining the expression and incorporating specifically
"body of individuals" within the ambit of particular category of persons redundant.
24. In view of the foregoing discussion, we are of the clear opinion that the
communion of husband and wife married under the custom of Goa and governed by
the Portuguese Civil Code constitutes "a body of individuals" for the purposes of the
Income Tax Act and it will have to be decided in respect of each head of income
whether the income has accrued or arisen to the body of individuals as such or to its
members individually. For that purpose, we will have to deal with each head of income.
Before doing so we may refer to rival submissions of both the parties based on the
decision of this court in Addl. CIT v. Valentino F. Pinto, Mapuca MANU/MH/0065/1983 :
[1984]150ITR408(Bom) and observations made therein that the ratio of the decision of
this court in Purushotam Gangadhar Bhende's case MANU/MH/0037/1974 : [1977]
106ITR932(Bom) will apply to "all income". We have carefully considered the said
decision. For reasons to be discussed a little later, we are of the opinion that so far as
it relates to income from all sources other that business, these observations are only
causal observations which do not form a binding precedent. So far as the decision
pertains to "business income", it is a decision per incuriam and, as such, it cannot be a
binding precedent.
25. Learned counsel for the assessee referred to the decision of this court in CIT v. Y.
S. Desale MANU/MH/0120/1982 : [1982]137ITR117(Bom) and submitted that this
26. Naturally, the interpretation should not be so as to destroy the separate identity of
the expression "body of individuals". The expression must have a distinct meaning of
its own; otherwise Parliament would not have introduced it. It may have some
common characteristics with "an association of persons" but it cannot be the same
thing as an association of persons or, as contended by the learned counsel, a mere
species of "association of persons" which is better described as "a body of individuals".
27. The issue before this court in Addl. CIT v. Valentino F. Pinto
MANU/MH/0065/1983 : [1984]150ITR408(Bom) related to the assessment of income
from business accruing to a communion of husband and wife governed by the
Portuguese Civil Code. The question was whether it was to be assessed in the hands of
the communion or separately in the hands of the husband and wife. This court referred
to its earlier decision in Purushotam Gangadhar Bhende's case MANU/MH/0037/1974 :
[1977]106ITR932(Bom) , and observed that, in the said judgment, although the
income considered and it was income from house property, the provisions of the
Portuguese Civil Code as well as article 1192 of the Commercial Code were considered
and it was observed that the respective half shares of the husband and wife in the
income from the house property, which the property of the communion of the husband
and wife married according to the custom of Goa, should be assessed separately in
equal shares in the hands of each of them, and not in the hands of "the body of
individuals" of the communion of husband and wife. This ratio, it was observed, "would
seem to apply to all types of income and cannot be restricted to house property". In
the light of this observation, the answer to the question before the court in that case
was given in favour of the assessee. We have carefully gone through the above
decision. We have already held that this decision, so far as it pertains to assessability
28. However, while concluding, the court used somewhat guarded language when it
observed (at page 410) : "This ratio would seem to apply to all types of income and
cannot be restricted to house property. If that be so, the two questions referred to us
can be answered without further elaborate discussion, either factual or legal." The
circumstances under which the court had to decide this case are evident from the
factual situation set out above. It is evident that the court's attention was not drawn to
the distinction in the matter of treatment of income under the head "House property"
and income under other heads which had been created by the Legislature it self by
virtue of specific provision contained in section 26 of the Act. It was not brought to the
notice of this court that the decision of this court in Purushotam Gangadhar Bhende's
case MANU/MH/0037/1974 : [1977]106ITR932(Bom) had been rendered on application
of section 26 of the Act which applied only to house property income and to no other
income. Under the circumstances, the same ratio cannot apply to income falling under
heads other than "income from house property". The said decision, therefore, is a
decision per incuriam, so far as it pertains to income from business which was the
subject-matter of controversy before it because, evidently, in that case this court acted
in ignorance of the relevant provisions of the Act. The general observations therein are
casual observations so far as they relate to income from other heads because the
treatment of income falling under any other head was not the subject-matter of
consideration before this court in that case. Such broad observations were neither
necessary for the decision of that case not justified on the basis of the discussions
contained therein.
29. It may also be not be out of place to mention here that the fact that a particular
combination of persons has been held to be a body of individuals or association of
persons in respect of a particular activity, does not mean that it will be so in respect of
all activities of income therefrom. The status may vary from activity to activity. This
aspect of the matter has been dealt at length by us an earlier decision in CIT v. Shiv
Sagar Estates (AOP) MANU/MH/0252/1992 : [1993]201ITR953(Bom) , Income Tax
Reference No. 231 of 1977 dated 17/18th December, 1992. It is observed thus (at
page 961) :
"A person or group of persons may work in more than one capacity. The
Income Tax Act clearly recognises dual capacity of a person or a group of
persons. In respect of the property in question, these persons were co-
owners, in the company they were shareholders, in the partnership firm
they were partners. They might also have formed an association of persons
to carry on any other activity. All these can go on simultaneously. The very
same persons may receive income as co-owners, as shareholders, as
partners or as members of an association of persons and their status in
respect of a particular income will not affect their status in respect of other
incomes."
31. We may next deal with the submission of learned counsel for the assessee in
regard to diversion of income by overriding title in view of the equal share of both the
husband and wife in the property and income of the communion by virtue of the
32. As observed by the Supreme Court in CIT v. Imperial Chemical Industries (India)
(P.) Ltd. MANU/SC/0203/1969 : [1969]74ITR17(SC) : "the true test for the application
of the rule of diversion of income by an overriding title is whether the amount sought
to be deducted in truth never reached the assessee as his income".
33. Applying the above test, we are of the clear opinion that the principle of diversion
of income by overriding title has no application in the case of communion of husband
and wife governed by the Portuguese law. In that view of the matter, for the purpose
assessment, it will be necessary to decide in respect of every income whether it has
accrued or arisen to the communion as a body of individuals or to both the husband
and wife separately in proportion to their shares in the property or to any one of them,
as in the case of "salary".
34. Before we proceed to discuss the question of accrual of income with reference to
each head of income, it may be expedient to deal with the last argument of learned
counsel for the assessee based on the provision of section 80C(2)(g) of the Act in
support of his argument that the communion should not be treated as a "body of
individuals". Section 80C(2)(g) provides for deduction of amounts paid to effect or
keep in force a life insurance policy on the life of any of the members or the child of
any of the members in computing the income of an association of persons of body of
individuals consisting, in either case, only of husband and wife governed by the system
of community of property in force in the State of Goa. We have perused the above
provision and considered the submission of learned counsel for the assessee. We fail to
understand how this provision supports the contention of the assessee that the
communion of husband and wife governed by the Portuguese law cannot be treated as
an association of persons or a body of individuals. On the other hand, in our opinion,
this provision clearly visualises an assessee which is an association of persons or a
body of individuals consisting in either case, only of husband and wife governed by the
system of community of property (referred to in this judgment as "communion") in
force in the State of Goa. Section 80C, so far as is relevant, as it stood at the material
time, reads :
(2) The sums referred to in sub-section (1) shall be the following, namely :-
(a) where the assessment is an individual, any sums paid in the previous
year by the assessee out of his income chargeable to tax - . . .
(b) where the assessee is a Hindu undivided family, any sums paid in the
previous year by the assessee out of its income chargeable to tax, to effect
or to keep in force in insurance on the life of any member of the family; . . .
..
(i) any sums paid in the previous year by the assessee out of its income
chargeable to tax -
(2) to effect or to keep in force a contract for a deferred annuity on the life
of any member of such association or body or any child of any of the
members of such association or body :
Provided that such contract does not contain a provision for the exercise by
the insured of an option to receive a cash payment in lieu of the payment of
the annuity; or
35. From a plain reading of the above provision, it is clear that different provisions
have been made for deduction depending upon the fact whether the assessee is an
individual, a Hindu undivided family or "an association of persons or a body of
individuals consisting, in either case, only of husband and wife governed by the system
of community of property in force in the State of Goa and the Union Territories of
Dadra and Nagar Haveli.
36. It is pertinent to note that the benefit of deduction has not been extended to all
associations of persons or bodies of individuals but has been restricted to associations
or bodies of individuals consisting, in either case, only of husband and wife governed
by the system of community of property in force in the State of Goa, etc. This
provision, in our opinion, instead of supporting the contention of the assessee, lends
full support to the conclusion arrived at by us that the communion of husband and wife
has to be treated as an association of persons or a body of individuals for the purpose
37. In the background of the above discussion, we may refer to some of the provisions
of the Act.
38. Section 4 is the charging section. It provides, inter alia, that Income Tax shall be
charged in respect of the total income of the previous year of every person. "Person"
has been defined in section 2(31) to include, inter alia, an individual, a Hindu undivided
family, a firm, "an association of persons or a body of individuals, whether
incorporated or not". Section 5 of the Act defines the scope of total income with
reference to residence in India. In respect of residents who are ordinary residents, it
provides that the total income of such person shall include all income from whatever
source derived which is received or deemed to be received in India or accrues or arises
or is deemed to accrue or arise to him in India or accrues or arises to him outside
India. By section 14, income has been classified, for the purpose of charge of Income
Tax and computation of total income, under the following heads of income :
"A. - Salaries
B. - Interest on securities
E. - Capital gains
39. The question for determination is which income in the instant case has accrued or
arisen to the association of persons or body of individuals consisting of husband and
wife governed by the Portuguese law in force in Goa, which has accrued or arisen to
both the husband and wife individually and which has accrued solely to any one of
them.
40. We may take up income from house property first. The income from house
property derived by a communion of husband and wife governed by the Portuguese
Civil Code will not be assessed in the hands of the communion but in view of section 26
of the Act, the share of each such person in the income of the property shall be
assessed in his or her individual hands. This aspect also stands concluded by the
decision of this court in Purushotam Gangadhar Bhende's case MANU/MH/0037/1974 :
[1977]106ITR932(Bom) . We are not concerned in the present case with interest on
securities. We, therefore, need not deal with the same.
41. So far as interest from bank accounts, fixed deposits, etc., is concerned, which
falls under the last head, viz., "Income from other sources", it may be observed that
this is a residuary head and various incomes may fall under it because income of every
kind which is not to be excluded from the total income under the Act shall be
chargeable to Income Tax under this head if it is not chargeable to Income Tax under
any other head specified in section 14. In the instant case, we are called upon to
decide the assessability of income from "interest" and "dividend" which was received
from investment of funds which belonged in equal shares to both the husband and
wife. There was no question of management or effort in deriving the above income. It
42. So far as the "profits and gains of business or profession" are concerned, having
held that the communion constituted a body of individuals which is a separate taxable
entity under section 4 of the Act read with section 2(31) thereof, in the absence of any
special provision to the contrary, we do not find any reason to hold that the income is
not assessable in the hands of the "body of individuals". The income from business
therefore, will be assessable in the hands of the combination as "a body of individuals"
and the same cannot be divided equally among the two members of the communion
for the purpose of assessment in their hands separately. While computing the income,
deduction shall, however, be available in respect of life insurance premium, etc., paid
for effecting insurance on the life of husband or wife or the child by virtue of the
special provision contained in section 80C(2)(g) of the Act.
43. So far as the salary income is concerned, it was contended by learned counsel for
the assessee that this income is also property and, therefore, belongs equally to the
husband and wife no matter who earns the salary. In that view of the matter,
according to learned counsel, the income from salary should be divided equally
between the husband and wife for the purpose of assessment and assessed
accordingly. We have given very careful consideration to the above submission. We,
however, find it difficult to accept the same, because such a conclusion will go counter
to all know principles of law regarding accrual or arising of income from salary. In this
connection, it may be mentioned that salary has been defined in section 15 of the Act.
What is chargeable to tax under the head "Salaries" is :
(b) any salary paid or allowed to him in the previous year by or on behalf of
an employer or a former employer though not due or before it became due
to him;
(c) any arrears of salary paid or allowed to him in the previous year by or on
behalf of an employer or a former employer, if not charged to Income Tax
for any earlier previous year."
44. For the removal of doubts, in the Explanation, it has been declared that where any
45. The above definition clearly goes to show that what is assessed under the head
"Salaries" is the salary due to the assessee from an employer or a former employer. In
the instant case, the husband was the employee. It was he who was employed. The
salary accrued to him and it was payable to him by the employer. The employer, while
doing so, was not concerned with the customary laws of his employee. It is impossible
to comprehend that the income from salary can be said to arise to a person who is not
in employment. The customary law or specific law of Goa determines the rights of the
husband and wife in the property and income. It cannot make the wife also an
employee where the husband is employed nor, by reference to such law, can it be said
that half of the salary due to the husband for the services rendered by him will accrue
to the wife. In matters like this, the customary law has no relevance. Situated thus, we
are of the clear opinion, that the income from salary is the income of the person who is
the employee which in the instant case was the husband and that being so, it was
assessable in the manner laid down in section 15 to 17 of the Act, in his hands alone
and no part of it can be assessed in the hands of the wife. The interest of the wife in
the said income by virtue of the customary law may, at the most, amount to
application of income after it has accrued or arisen to the husband who is the
employee. Serious anomalies would arise if we were to agree with the contention of
the assessee that income from salary derived by one person is to be treated as income
derived by two persons, because in that case, the person who is not an employee, who
does not have anything to do with the employer and does not receive anything from
him, will be deemed to be in receipt of salary from the employer and will also be
entitled to standard deduction which is intended to cover expenses incidental to the
earning of such income. It may also be observed that though the standard deduction is
expressed in terms of percentage of the salary, there is a ceiling fixed for such
allowance. If the income is assessed in entitled to claim standard deduction which, in a
given case, may far exceed the ceiling or may go up to double the amount of the
ceiling. We find it extremely difficult to accept such a submission. We, therefore, reject
the same. We hold that the whole of the income from salary is assessable in
employment and to whom it is due from the employer. The same will apply to
remuneration received by a person working as managing director of a company
because such remuneration will be assessed as income from salaries.
46. In the light of the foregoing discussion, we answer the first question as follows :
The Tribunal was right in holding that the income from business and share
of income from the two partnership firms is to be assessed in the hands of
the body of individuals consisting of the husband and wife. The Tribunal,
however, was not correct in holding that interest earned on bank accounts
was also assessable in the hands of the body of individuals. It has to be
assessed in the hands of the respective co-owners on whose investment
such interest has been received.