COMMISSIONER OF INCOME TAX Vs. KHAMBATY F Y

JUDGEMENT

(1.) THESE four references arise on a case stated under S. 256(1) of the IT Act, 1961. The assessment years with which we are concerned in these references are the asst. yrs. 1967 68 to 1970 71. The references arise on a common statement of the case and the contentions raised in these references are also the same. Hence, the references are being disposed of by this common judgment. The question which has been referred to us for our determination is as follows :

(2.) THE assessee, F. Y. Khambaty, was a partner in the firm of M/s F. Y. Khambaty and Sons, Kano, Nigeria (referred to hereinafter as "the said firm"). Among the other partners in the said firm were his wife and two minor sons in the asst. year 1967 68 and one minor son in the other three assessment years. The assessee's two major daughters were also partners. In the accounting year relevant to the asst. year 1967 68, the wife and two minor sons of the assessee earned from the said firm a share of income amounting to Rs. 95,561. In the accounting period relevant to the asst. yr. 1969 70, the wife and minor son earned interest amounting Rs. 13,256 from the said firm. These incomes of the wife and the minor sons were included in the assessee's income for assessment in the aforesaid two assessment years. During the accounting periods relevant to the said two assessment years, the assessee was a non resident in India. In the accounting period relevant to the asst. yrs. 1968 69 and 1970 71, the assessee was a resident but not ordinarily resident in India. In respect of the accounting period relevant to the asst. year 1968 69, the wife and the minor sons of the assessee earned from the said firm interest amounting to Rs. 12,410 and in the accounting period relevant to the asst. year 1970 71, the wife and the minor son of the assessee earned interest amounting to Rs. 7,077 on deposits made by them in Barclay's Bank, Kano. All this income was also assessed in the hands of the assessee. It is common ground that the assessee was not taxed on his own share of income from the said firm in Nigeria. However, the ITO concerned invoked the provisions of S. 64(1)(iii) and (iv) of the IT Act, 1961, and included the aforesaid incomes earned by the wife and the minor sons in the total income of the assessee for the purpose of taxation. On appeals filed by the assessee, the AAC took the view that S. 64 and s. 5 of the said Act have to be read harmoniously and in that case, the interest income and the share of profit earned by the wife and minor sons as set out earlier could not be included in the total income of the assessee for the purpose of taxation. The Revenue preferred appeals to the Tribunal. The Tribunal upheld the views taken by the AAC in favour of the assessee. It is from this decision of the Tribunal that the aforesaid question has been referred to us. We may point out that it is common ground that the assessee had other income in respect of which he was liable to be taxed under the IT Act in all the aforesaid assessment years.

(3.) THE submission of Mr. Jetley, learned counsel for the CIT, is that in view of the provisions of sub s. (1) of S. 64 of the IT Act, 1961, to which we have already referred, the income of the wife and the minor sons of the assessee from their share of income in the said firm and the interest earned by them as set out earlier was liable to be included in the total income of the assessee. It was submitted by him that the provisions of S. 5 of the said Act have to be read subject to the provisions of S. 64 because of the expression "subject to" occurring in the opening part of sub ss. (1) and (2) of S. 5. It was contended by him that although the assessee might not have been liable to pay any tax on his share of income in the said firm which was carrying on business in Nigeria and not controlled from India, the income earned by his wife and minor sons from the said firm was liable to be included in his total income which was taxable in India. We find it difficult to accept these submissions. The proviso to cl. (c) of Sub S. (1) of S. 5 provides that in the case of a person not ordinarily resident in India, the income which accrues or arises to him outside India shall not be included in his total income, unless it is derived from a business controlled in or a profession set up in India. Similarly, the plain language of Sub S. (2) indicates that the total income of a non resident includes only the income received or deemed to be received by him in India or income accruing or arising or deemed to accrue or arise to him in India during the relevant accounting year. It appears to us that the expression "subject to" used in the opening portion of both the sub ss. (1) and (2) of S. 5 has to be read keeping in mind that S. 5 is intended to explain the scope of total income. Therefore, what the use of the said expression shows is that in considering what is total income under S. 5, one has to exclude such income as is excluded from the scope of total income by reason of any other provision of the IT Act and not that the other provisions of the IT Act override the provisions of S. 5 as suggested by Mr. Jetley. If we were to give the provisions of S. 5, the interpretation sought to be placed on them by Mr. Jetley, the result would be that in the case, for example, of a non resident assessee, having some taxable income in India, even the income earned by his wife and minor sons who are not resident in India from a partnership business carried on abroad and not controlled from India in which the assessee is a partner would be liable to be included in the total income of the assessee and liable to be taxed in India. We find it difficult to believe that the legislature had any such intention in mind in enacting the provisions of S. 5 and s. 64. Accepting the submission of Mr. Jetley, in our view, would amount to straining the plain language of S. 5 to bring about an illogical and unjust result and there is no warrant for us to do so. It was submitted by Mr. Jetley that if we interpret the provisions of S. 5, as we have done above, the result would be that even if an assessee is ordinarily resident in India, the income earned by his wife and minor sons from a partnership carried on abroad in which the assessee is a partner would not be included in his total income. We totally fail to see how such a result would be brought about by the construction we have put on S. 5. If the assessee is ordinarily resident in India, his total income would include even the income which is earned by him abroad and, in such a case, the provisions of S. 64 would come into full play and the respective shares of profit coming to the wife and minor sons of the assessee in a firm in which the assessee is a partner would certainly be included in his total income. In fact, Mr. Jetley was unable to explain how such income would not be included in the total income of an assessee ordinarily resident in India on the construction we have put on S. 5. We may point out that the construction put by us on the provisions of S. 5 and S. 64 is in accord with the language of these sections and also appears to be a reasonable construction because, generally speaking, the object of cls. (i) to (iv) of Sub S. (1) of s. 64 seems to be to treat the incomes covered therein as if they were the income of the assessee himself and that appears to be the intention of the legislature in enacting the said provisions.