Bombay High Court
Dr. J.M. Mokashi vs Commissioner Of Income-Tax on 13 March, 1993
Equivalent citations: 1994 207 ITR 252 Bom
Author: . B Saraf
Bench: B Saraf, V Mohta
JUDGMENT Dr. B.P. Saraf, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961 (“the Act”), the Income-tax Appellate Tribunal has referred the following question of law to this court for opinion :
“Whether, on facts and in the circumstances of the case, the Income-tax Appellate Tribunal has rightly held that the income of the assessee’s wife is includible in the income of the assessee under section 64(1)(ii) of the Income-tax Act, 1961 ?”
2. The assessee is a practising physician and cardiologist. His wife, Smt. Jayashree J. Mokashi, had passed first year Arts of the Bombay University and was employed by him as a receptionist-cum-accountant. During the accounting period, relevant to the assessment year 1978-79, the assessee paid a sum of Rs. 8,100 to her by way of salary. This amount was included by the Income-tax Officer in the income of the assessee by applying the provisions of section 64(1)(ii) of the Act. The assessee preferred an appeal to the Appellate Assistant Commissioner of Income-tax. The appeal was rejected and the order of the Income-tax Officer was affirmed by the Appellate Assistant Commissioner. The assessee filed a second appeal before the Tribunal. As there were some conflicting decisions of the various Benches of the Tribunal on the point of issue, the Tribunal, by its order dated October 15, 1980, referred the matter to a Special Bench for hearing and decision.
3. Before the Special Bench of the Income-tax Appellate Tribunal, the orders of the Income-tax Officer and the Appellate Assistant Commissioner were challenged on various grounds. The first contention of the assessee was that the word “concern” appearing in section 64(1)(ii) did not include “profession”, as distinguished from “business” and, as such, the provisions of the above section were not applicable. The second contention was that the expression “substantial interest” appearing in section 64(1)(ii) read with Explanation 2(ii) referred only to a proportion of the whole interest and not the “whole interest”, and as such, section 64(1)(ii) had no application to a proprietary concern in which the assessee has 100 per cent. interest. The third contention of the assessee was that possession of “technical or professional qualifications” by the spouse of the assessee does not mean that she must hold a degree of a competent authority or university in a particular technical or professional subject. According to the assessee, it is sufficient if the spouse concerned possesses necessary technical or professional knowledge and experience which might enable her to perform her duties. Another argument of the assessee was that the word “and” appearing twice in the proviso to section 64(1)(ii) should be interpreted as “or” and, consequently, the proviso should be held applicable if any of the two requirements, viz., the spouse possesses technical or professional qualifications or the income as attributable to her technical or professional knowledge exists.
4. The Tribunal rejected all the above contentions of the assessee and held as follows :
“(i) Section 64(1)(ii) applies, inter alia, to individual assessees, who are proprietors;
(ii) “concern” means business as well as a professional concern;
(iii) a concern in which the individual has a substantial interest would include a concern in which the individual has a cent per cent interest;
(iv) “professional qualifications” means fitness to do a job or undertake an occupation or vocation requiring intellectual skill or requiring manual skill as controlled by intellectual skill and which is such that a person should be able to eke out a living therefrom independently though the salary does not cease to be the product of professional skill merely because a particular employment is accepted;
(v) the term “technical” implies specialised knowledge generally of a mechanical or scientific subject or any particular subject;
(vi) the word “and” appearing twice in the proviso to section 64(1)(ii) means “and” and not “or”; and
(vii) “experience” as appearing in the proviso to section 64(1)(ii) includes experience acquired in the course of acquiring technical or professional qualifications.”
5. The Tribunal, on a consideration of the facts of the assessee’s case in the light of the aforesaid interpretation of section 64(1)(ii) of the Act, observed that there was no material on record to show that Mrs. Mokashi had any technical or professional qualification or that the salary paid to her was attributable to any technical or professional knowledge and experience of hers. In view of the aforesaid findings of fact, the Tribunal confirmed the order of the Appellate Assistant Commissioner and the Income-tax Officer.
6. Aggrieved by the order of the Tribunal, the assessee applied to the Tribunal for reference of the question of law arising out of its order to this court for its opinion. The Tribunal, on being satisfied that a question of law did arise, referred the question set out above to this court for opinion.
7. We have heard Mr. V. Patil, learned counsel for the assessee, and Mr. G. S. Jetly, learned counsel for the Revenue. Learned counsel for the assessee reiterated all the submissions made on behalf of the assessee before the Tribunal. In support of the same, reliance was placed on the decision of the Andhra Pradesh High Court in Batta Kalyani v. CIT [1985] 154 ITR 59; of the Kerala High Court in CIT v. Sorabji Dorabji [1987] 168 ITR 598 and Dr. K. Thomas Varghese v. CIT [1986] 161 ITR 21; of the Gujarat High Court in CIT v. Dr. K. K. Shah [1982] 135 ITR 146 and of the Madhya Pradesh High Court in CIT v. Madhubala Shrenik Kumar [1990] 181 ITR 180. Learned counsel for the Revenue supports the decision of the Tribunal. According to him, neither the expression “concern” can be equated to “business establishment” nor the words “technical or professional qualifications” be equated to educational qualifications. These words have their special meaning and they have to be interpreted accordingly. Counsel further submits that the use of the word “experience” with technical and professional qualification in the latter part of the proviso is intended to restrict the scope and ambit thereof and not to enlarge it.
8. Counsel also submits that the definition of “substantial interest” is intended to specify the lowest limit of the interest of the assessee in the concern which will attract the provisions of section 64(1)(ii). It cannot be interpreted to mean that interest higher than the lowest limit specified in the definition will not amount to “substantial interest”. Such an interpretation will be most unnatural and will go counter to the very object and scheme of section 64(1)(ii).
9. We have carefully considered the rival submissions. Before we deal with the same, it will be expedient to set out section 64(1)(ii). This section as it stood at the material time, reads :
“64. Income of individual to include income of spouse, minor child, etc. – (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly -. . . .
(ii) to the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest :
Provided that nothing in this clause shall apply in relation to any income arising to the spouse where the spouse possesses technical or professional qualifications and the income is solely attributable to the application of his or her technical or professional knowledge and experience;. . . .
Explanation 2. – For the purposes of clause (ii), an individual shall be deemed to have a substantial interest in a concern –
(i) in a case where the concern is a company, if its shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits), carrying not less than twenty per cent. of the voting power are, at any time during the previous year, owned beneficially by such person or partly by such person and partly by one or more of his relatives;
(ii) in any other case, if such person is entitled, or such person and one or more of his relatives are entitled in the aggregate, at any time during the previous year, to not less than twenty per cent. of the profits of such concern.”
10. From a plain reading of section 64(1)(ii) of the Act, it is clear that this section lays down various circumstances under which income of certain family members specified therein, namely, spouse, minor child, son’s wife and son’s minor child is clubbed with the income of the assessee.
11. Clause (ii) provides that the income derived by the spouse of an individual by way of remuneration, etc., from a concern in which the individual has substantial interest shall be included in the income of the said individual. The only exception is contained in the proviso to clause (ii) which provides that the said clause shall not apply where the spouse possesses technical or professional qualifications and the remuneration can be solely attributed to the application of such technical or professional knowledge and experience of the spouse.
12. The assessee has raised a number of controversies in regard to the interpretation of the above provisions and the true meaning of some of the expressions used therein. We shall deal with them one by one. First, we may deal with the controversy in regard to the scope and ambit of the expression “concern”. According to the assessee, the expression “concern” refers only to business establishments as contrasted with professional organisations which depend on the personal skill and knowledge of the person concerned. Establishments of professionals like doctors, according to counsel for the assessee, do not fall within the ambit of the expression “concern”, and as such, section 64(1)(ii) has no application to payments made by an individual, who is a professional, to the spouse of such individual. We have carefully considered the above submission. We, however, find it difficult to accept the same and give such a narrow and constricted meaning to the word “concern” which is neither natural nor borne out from the setting and context in which it appears. The word “concern” is a word of wide import. It has various shades of meanings. According to the dictionaries, it means “something which pertains to a person; business affairs;”. It also means “a matter that engages a person’s attention, interest or care or that affects his welfare or happiness”. In Black’s Law Dictionary (Sixth edition), it has been defined thus :
“Concern. To pertain, relate or belong to; be of interest or importance to; have connection with; to have reference to; to involve; to affect the interest of.”
13. From the above definitions, it is evident that the word “concern” is a word of wide import and it conveys different ideas and meanings depending upon the context and setting in which it appears. In the context of section 64(1)(ii) of the Act read with Explanation 2 thereto, it is clear that “concern” includes any company, firm, individual or any other entity carrying on business or professional activity. It cannot be given any restricted meaning to take out of its ambit professional organisations or organisations run as proprietary establishments. It cover all establishments or organisations – whether engaged in business activities or professional activities. This is so also because the word “business” itself is a word of wide import and has been broadly interpreted to include “professions, vocations and callings”. It is in this context that in Barendra Prasad Ray v. ITO [1981] 129 ITR 295, the Supreme Court, while interpreting the expression “business connection” appearing in section 9(1) of the Act, held as follows (at page 306) :
“The word ‘business’ is one of wide import and it means an activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earning an income. We are of the view that in the context in which the expression ‘business connection’ is used in section 9(1) of the Act, there is no warrant for giving a restricted meaning to it excluding ‘professional connections’ from its scope.”
14. We are, therefore, of the clear opinion that the expression “concern” appearing in section 64(1)(ii) of the Act is a word of wide import and takes within its sweep and ambit all organisations or establishments engaged in business or profession, whether owned by a company, partnership or individual or any other entity.
15. We now turn to the next contention of the assessee that section 64(1)(ii) being applicable to concerns in which the assessee has a substantial interest within the meaning of Explanation 2 thereto, a proprietary concern in which the individual has cent per cent. interest does not fall within the purview thereof. We have considered the above submission. We, however, do not find any force in the same. Explanation 2 is a deeming provision which provides that in a case where the concern is a company, the assessee shall be deemed to have substantial interest therein if he holds not less than twenty per cent. of its shares and in other cases, if he is entitled to not less than twenty per cent. of the profits of such concern. The object of this Explanation is to create a legal fiction to extend the application of section 64(1)(ii) to concerns in which the interest of individual concerned exceeds the limits specified therein. It sets out the lowest limit of interest of the individual in the concern for the purpose of applicability of section 64(1)(ii). Its object is to widen the net of the section – not to restrict it. No outer limit of interest of the individual has, therefore, been specified. It will be a most unreasonable and unnatural interpretation of Explanation 2 to hold that though persons having “not less than twenty per cent. of the profits of the concern” shall be deemed to have substantial interest in the concern, persons having cent per cent. interest will not be deemed so. We, therefore, reject the above contention of the assessee in regard to the interpretation of Explanation 2 and hold that an individual entitled to cent per cent. of the profits of a concern is a person having substantial interest within the ordinary meaning of the expression itself. No resort to the deeming provision contained in Explanation 2 is necessary in such a case, though even on application thereof, the same result will be achieved.
16. We are now left with the objections of the assessee based on the interpretation of the proviso to section 64(1)(ii). As earlier indicted, section 64(1)(ii) provides for clubbing with the income of an individual, the income of the spouse of such individual by way of salary, commission, remuneration, etc., derived from a concern in which the individual has substantial interest. The only exception is contained in the proviso thereto. If the spouse possesses technical or professional qualification, any income derived by such spouse even from a concern falling in section 64(1)(ii) read with Explanation 2 thereto will not be liable to be clubbed with the income of the spouse provided the “income” too fulfils the requirement of the second part of the proviso. We may, for a better understanding, dissect the requirements of the proviso to section 64(1)(ii) as follows :
“(i) The spouse possesses ‘technical or professional qualifications’; and
(ii) the income is solely attributable to the application of his or her technical or professional knowledge and experience.”
17. A serious controversy has been raised by learned counsel for the assessee in regard to the interpretation of these conditions. According to counsel, the “qualification” mentioned in the above clause should be liberally interpreted to mean and include any qualification which makes a person suitable for a job. It should not be given any narrow or restrictive meaning. Secondly, according to counsel, the two conditions set out above should be read harmoniously. The two conditions are not cumulative but alternative, and the use of the words “knowledge and experience” in the second part goes to show that the proviso will be applicable even in cases where the spouse does not possess technical or professional qualification but has the requisite technical or professional knowledge or experience – submits counsel for the assessee.
18. We have carefully considered the above submissions of counsel for the assessee. We are not impressed by the same. Accordingly to us, these submissions are based on a totally erroneous interpretation of the proviso, which, to our mind, is very clear and unambiguous.
19. In order to claim the benefit of the proviso to avoid clubbing of income under section 64(1)(ii) of the Act, both the conditions specified in the proviso must be satisfied. The first condition relates to the spouse of the individual who must possess “technical or professional qualifications”. If this condition is not satisfied, the proviso will not apply and reference to the second requirement will be unnecessary. If the first condition in regard to the qualification of the spouse is satisfied, it will be necessary to refer to the second condition which pertains to the income that will not be clubbed. It may be pertinent to mention that even in the case of a spouse possessing technical or professional qualification, only the income arising to such spouse which is solely attributable to the application of his or her technical or professional knowledge and experience will be out of the purview of section 64(1)(ii) and not the whole of the income of such spouse. It is in this context that the words “technical or professional knowledge and experience” have been used in the latter part of the proviso in contradistinction to “technical or professional qualifications” used in the earlier part. Thus, two different expressions have been used by Parliament in the very same proviso, not inadvertently, but with a deliberate purpose. We shall revert back to this aspect a little later, after discussing the true meaning and import of the first condition, viz., possession of technical or professional qualification.
20. The word “qualification” simpliciter is a word of very wide import and, in the absence of any qualifying words or expression, conveys the idea of any quality which makes a man fit for any job or any activity in life. The word “qualification” has been defined in the Random House Dictionary of English Language to mean “a quality, accomplishments, etc.” Black’s Law Dictionary (sixth edition) contains the following definition of “qualification” :
“Qualification. – The possession by an individual of the qualities, properties, or circumstances, natural or adventitious, which are inherently or legally necessary to render him eligible to fill an office or to perform public duty or office. . . .”
21. But, the word “qualification” in the proviso to section 64(1)(ii) if qualified by the words “technical or professional”. In that view of the matter, its broad meaning will not be relevant for the present purpose. We have, in fact, to ascertain the true meaning of “technical qualifications” or “professional qualifications”.
“Technical” according to Black’s Law Dictionary, means “belonging or peculiar to an art or profession”.
22. According to Random House Dictionary of the English Language, “technical”, inter alia, means :
“1. Pertaining to or suitable for an art. . . .”
23. Similarly, “profession” means a vocation or occupation requiring special, usually advanced education, knowledge, and skill, e.g., law or medical profession. (See Black’s Law Dictionary, sixth edition). Halsbury’s Laws of England (fourth edition, Vol. 23), describes “profession” as follows :
“. . . . A profession involves an idea of an occupation requiring either purely intellectual skill, or if any manual skill is involved, as in painting, sculpture, or surgery, skill controlled by the operator’s intellectual skill, as distinguished from an occupation which is substantially a production or sale or arrangement for the production or sale of commodities. The word ‘profession’ is certainly wider than the old definition of the learned professions – the church, medicine and law. A company cannot carry on a profession.”
24. Though the word profession now has a broader and more comprehensive meaning than formerly was accorded to it and its signification now extends far beyond the well-known classical professions of earlier days and as the applications of science and learning are extended to other departments or affairs other vocations also receive the same treatment, persons engaged in executive and clerical aspects of business organisations, brokers, insurance agents, etc., are not held to be engaged in the practise of a profession. (See Corpus Juris Secundum, Vol. 72). The word “profession” still retains its distinct character and does not take within its ambit any and every activity or employment undertaken by a person for his livelihood.
25. If we read the expression “technical or professional qualification” used in the proviso to section 64(1)(ii) in the light of the above definitions of “technical” and “professional”, it becomes clear that the “qualification” mentioned therein must be such which makes a person eligible for technical or professional work. A person can, therefore, be said to be in possession of requisite technical qualification when by virtue thereof, he is eligible to perform that function. Similarly, professional qualification must mean qualification which is necessary for carrying on the particular profession. Take, for example, the legal profession. The requisite qualifications for carrying on the legal profession have been laid down by the statute. In such a case, a person possessing such qualification alone can be said to be in possession of professional qualification, because such qualification is a must for carrying on the profession. Knowledge of law or experience is not relevant for that purpose. Similarly, a person cannot carry on medical profession unless he possesses the requisite degree. Similarly, there are technical jobs which require degrees and diplomas – whereas, there are a few others where university degree or diploma is not necessary. Adequate training and evidence thereof might be sufficient. Thus, the nature of professional qualification will vary from profession to profession. Similarly, the nature of technical qualification will also vary depending on the nature of the technical job. What is technical or professional qualification, therefore, will have to be decided in each case depending upon the nature of the profession or the technical work. But one thing is certain that it is not any and every qualification, academic or otherwise, which can bring a spouse within the scope and ambit of the proviso to take the income out of the clubbing provision. It is the possession of only technical or professional qualification necessary for undertaking the particular technical job or carrying on the profession to which the income is attributed that will meet the requirement of the first part of the proviso. “knowledge and experience” will not be relevant for that purpose. A spouse, well-versed in law and experienced in the working of the legal profession, cannot be said to be in possession of professional qualification for carrying on the legal profession if he or she does not possess the requisite degree or diploma. Payments made to the spouse in such a case for any legal services cannot be brought within the purview of the proviso by reference to the words “knowledge and experience” occurring in the latter part thereof.
26. The second requirement of the proviso, in fact, refers to the income of the spouse from a concern falling under section 64(1)(ii) and restricts the benefit of the proviso even in the case of an eligible spouse only to that part of the income which can be “solely attributed to the application of his or her technical or professional knowledge and experience”. This provisions makes it clear that the possession of technical or professional qualification is a condition precedent on fulfilment of which that part of the income which falls in the second part of the proviso is excluded from the operation of the clubbing provision. Take, for example, the case of the wife of an individual who is a qualified legal practitioner. Her professional services are utilised by the assessee and remuneration paid to her by way of salary, fees, etc. In such a case, she fulfils the first requirement of the proviso and she is, therefore, entitled to the benefit of the proviso. But, the benefit is again hedged in with certain conditions and is limited to the extent indicated in the proviso. In that context, her “knowledge and experience” will assume significance. Take for example, the case of the wife of the individual who has just passed the LL. B. examination and enrolled herself as an advocate or having passed the LL. B. examination, did not practice law for long but has started doing so just a year or two back. Her professional services as a lawyer are utilised in the concern of her husband and she is paid remuneration therefor. In such a case, when the assessee claims the benefit of the proviso to avoid clubbing of such income of his wife with his own income, he will be required to satisfy that the remuneration so paid to her for her legal services was “solely attributable to the application of her professional knowledge and experience” as a lawyer. If the taxing authorities find that the remuneration paid for the legal services was excessive or high having regard to her limited professional knowledge and experience, he may determine the amount of remuneration which can be solely attributed to the application of her professional knowledge and experience and exclude only that part of her income from the clubbing provision contained in section 64(1)(ii). Thus, the object of the second part of the proviso is to restrict the benefit of the proviso only to reasonable payments for professional services and to put a check on diversion of income to the spouses possessing technical or professional qualifications in the guise of salary, fees, etc., for professional or technical services with a view to reduce the incidence of tax.
27. The forgoing discussion clearly goes to show that the two conditions mentioned in the proviso are cumulative and not alternative. They deal with two different aspects – one pertains to the eligibility of the spouse to claim benefit of the proviso, the other to the income which would qualify for exclusion from clubbing. Both are relevant and equally important. There is no scope for mixing up the two and diluting the first condition relating to qualification of the spouse by reference to the expression “knowledge and experience” in the second condition. Any attempt to do so will go counter to the clear language, scheme and object of the proviso and the well-accepted rule of interpretation that one part of a section or clause should not be construed in such a manner as to render the other part redundant. It is a cardinal rule of interpretation of statutes that a construction which would leave without effect any part of the statute should normally be rejected. We are, therefore, clear in our mind that there is no conflict between the two requirements of the proviso, each deals with a different aspect and both of them must be satisfied, though the second comes into operation only on fulfilment of the first condition, not otherwise.
28. The above view of ours gets full support from the decision of the Karnataka High Court in CIT v. D. Rajagopal [1985] 154 ITR 375, where it was held that both the conditions of the proviso must be satisfied for excluding the income of the spouse from the operation of section 64(1)(ii) of the Act.
29. In Kamlabai Gujri (Smt.) v. CIT [1986] ITR 33, the Madhya Pradesh High Court also held that it was solely for the assessee to show that the salary received by her was solely attributable to the application of her professional knowledge and experience. This decision does not, in any way, help the assessee as it cannot be construed to have held that the first condition regarding “possession of professional or technical qualification” need not be satisfied. On the other hand, this decision presupposes that the first condition if fulfilled. Reliance was placed by the assessee on another decision of the Madhya Pradesh High Court in CIT v. Madhubala Shrenik Kumar [1990] 181 ITR 180, where it was held that the words “technical or professional qualifications” occurring in the proviso cannot be construed to mean obtaining a degree or diploma from a recognised body. This part of the controversy, we have dealt with at length in the foregoing discussion. We have already held that the nature of qualification will vary from case to case. We have, however, made it clear that for the interpretation of the word “qualification” in the first part, reference to the expression “knowledge and experience” in the latter part is not correct. We, therefore, find it difficult to agree with the above decision if it is interpreted to have held so. Reliance was also placed on the decision of the Andhra Pradesh High Court in Batta Kalyani v. CIT [1985] 154 ITR 59, where it was held that the harmonious construction of the two parts of the proviso would be that if a person possesses technical or professional knowledge and the income is solely attributable to the application of such technical or professional knowledge and experience, the requirements for the application of the proviso are satisfied, although the person concerned may not possess any qualification issued by a recognised body. It was further held that it is enough for the purposes of the proviso if the recipient of the salary possesses the attributes of technical or professional qualification, in the sense that he has got expertise in such profession or technique. If by the use of that expertise in the profession or technique, the person concerned earns a salary, then the latter part of the proviso is also satisfied. We have carefully considered the above decision. In our opinion for the reasons set out by us in this decision, the interpretation of the proviso by the Andhra Pradesh High Court is not correct. It goes counter to the express language of the proviso. We, therefore, express our inability to agree with the same.
30. In the instant case, the spouse of the assessee neither possessed any technical or professional qualification nor was she paid for any technical or professional services rendered by her. Admittedly, she had passed first year Arts of the Bombay University and that was her only qualification. She was employed by her husband, the assessee in this case, as receptionist-cum-accountant and paid a salary for that employment. In such a case, it is not only difficult but impossible to hold that she possessed any “technical or professional qualification” which is necessary to bring her within the proviso. That being so, the proviso to section 64(1)(ii) is not applicable to her and, as such, the assessee is not entitled to get the benefit thereof to bring her income out of the purview of the clubbing provision contained in section 64(1)(ii).
31. In view of the foregoing discussion, we answer the question referred to us in the affirmative, i.e., in favour of the Revenue and against the assessee. Under the facts and circumstances of the case, we make no order as to costs.
32. Certified copy expedited.