1. This appeal by the assessee relates to the assessment year 1978-79.
The assessee is an individual. He derived income, amongst other items, from interest as well as dividends. In respect of such income, under the provisions of section SOL of the Income-tax Act, 1961 ("the Act"), deduction of Rs. 3,000 was allowed in the assessment. By invoking the provisions of Section 64 of the Act, the ITO brought to tax bank interest received by the assessee's wife out of investment of transferred funds. Such interest included was to the extent of Rs. 4,125. The claim of the assessee was that a separate deduction of Rs. 3,000 should have been allowed and only Rs. 1,125 should be included in making the assessment. The ITO did not accept the plea and gave his reasons for the same as under : Section SOL - Deduction - In the computation, the assessee claims Section 80L deduction of Rs. 3,000 separately for the income of his wife included under Section 64. The claim is not admissible for the following reasons : 1. In the first instance, computation of total income has to be made in accordance with the provisions of this Act and such total income before allowing deductions under Chapter VI-A is termed the 'gross total income'.
2. In computing the total income, the income from transferred assets as specified in Section 64 is also to be included in the hands of the transferor.
3. The question of allowing deduction under section SOL arises only after such computation is made and it is nowhere stated that while taking the income from transferred assets for purposes of computation, deductions under Chapter VI-A have to be separately allowed on incomes so included.
4. In the absence of any specific provision or any ambiguity in interpretation, the deduction has to be allowed only once to the maximum extent permissible.
Accordingly, a sum of Rs. 3,000 alone is allowed and not Rs. 6,000 as claimed.
2. Thereafter, the assessee appealed to the AAC and relying on the decision of the Appellate Tribunal Madras Bench 'C' in P.N. Rameswamy v. ITO [IT Appeal No. 2172 (Mds.) of 1971-72 dated 28-4-1976], claimed deduction of an amount of Rs. 3,000 from the interest income of the wife before inclusion, in the case of the assessee. The AAC took the stand that he was not able to agree with the conclusion of the Tribunal for several reasons. According to him Section 64(1)(iv) required all income as arisen directly or indirectly to the wife to be included in the hands of the assessee. Again, according to him, section SOL provided for deduction only from the gross total income in computing the total income and he expressed the view that the interest income of the wife already stood included in the gross total income of the assessee and, therefore, only a single deduction of Rs. 3,000 would be admissible. He also referred to the definition of "gross total income" in Section 80B(5) of the Act, which read as under, in support of his conclusion that one amount of Rs. 3,000 is deductible : (5) 'gross total income' means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter or under Section 280-O.3. The assessee appealed to the Tribunal. The revenue placed reliance on a decision of the Ahmedabad Bench of the Tribunal in ITO v. G.V.Rhatt [IT Appeal No. 1148 (Ahd.) of 1977-78, dated 9-4-1979] in support of its contention that only one amount of Rs. 3,000 could be deducted.
The Bench by an order dated 29-8-1981 directed that the papers be placed before the President in view of the conflict in opinion between the decision of the Madras Bench of the Tribunal and that of the Ahmedabad Bench. The President accordingly directed that the case be heard by this Special Bench and in these circumstances we proceed to dispose of the appeal.
4. In the preamble we have already set out the facts and the short point which arises for our consideration is whether in terms of provisions of section SOL two amounts of Rs. 3,000 are to be deducted, i.e., once in the hands of the assessee in respect of his interest/dividend income and separately in the hands of the assessee's wife in respect of her interest income out of transferred assets before such income is included in the hands of the assessee.
5. The assessment year under consideration is 1978-79. We would very briefly set out the history relating to the introduction and amendments in the provisions of section SOL. In the year 1967 section SOL, as introduced, provided for deduction from the gross total income of dividend income where it did not exceed Rs. 500. With effect from 1-4-1969, the section was amended to provide for deduction from the gross total income of an amount of dividend income up to Rs. 500. With effect from 1-4-1970 the exclusion of dividend income from the gross total income was permissible up to the amount of Rs. 1,000. With effect from 1-4-1971 further deductions were provided in section SOL and apart from dividends, where the gross total income of an assessee included any income by way of interest on deposits with a banking company, such interest income was also excludible up to a limit of Rs. 3,000 in the aggregate together with other items deductible under section SOL.
6. A thread which runs uninterrupted right from the inception when section SOL was introduced and up to the current assessment year when section SOL remains in substantially a similar form as modified with effect from 1-4-1972, is that a deduction is to be made "where the gross total income of an assessee includes any income by way of" the stipulated varieties.
7. This takes us to the concept of "gross total income". "Gross total income" was defined in Section 80B(5) originally as "gross total income" means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter or under Section 280-O and without applying the provisions of Section 64". [Emphasis supplied by us]. By the Taxation Laws (Amendment) Bill, 1969, it was provided by Clause 20 that the words "and without applying the provisions of Section 64" shall be deemed to have been omitted with effect from 1-4-1968. The Notes on Clauses stated : Clause 20 seeks to amend, retrospectively from 1-4-1968, the definition of 'gross total income' contained in Clause (5) of section SOB of the Income-tax Act. The effect of the proposed amendment will be that in the case of an individual, 'gross total income' will include also any income arising to the spouse or minor child of the individual in respect of which the individual is chargeable to tax under Section 64 of the Income-tax Act. [1969] 72 ITR (St.) 100.
In due course, the proposed amendment became law consequent to amendments introduced by Section 18 of the Taxation Laws (Amendment) Act, 1970 ([1970] 79 ITR (St.) 12). Section 80B(5), as it stands amended retrospectively with effect from 1-4-1968, which defines "gross total income", now reads : (5) 'gross total income' means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter or under Section 280-O.The provisions of section SOL provide that where the gross total income includes interest from a banking company there shall be allowed deduction to the extent of Rs. 3,000 (maximum). The submission of the learned counsel for the assessee was that in computing the total income only real income could be included. In other words, according to him, what has to be included even if income is aggregated under Section 64, should be the real income which the spouse is in receipt of. Therefore, he submitted that all outgoings, including statutory deductions as admissible under the Income-tax Act, should be deducted and only the net amount should be transferred and included in the hands of the transferor of the assets in the present case, i.e., the husband. Hence, he urged that the deduction permissible under section SOL of Rs. 3,000 should be excluded from the interest income received by the assessee's wife out of the transferred funds of Rs. 4,125 and only balance should be included.
The learned departmental representative, on the other hand, submitted that under the provisions of Section 64 in computing the total income of an individual there shall be included all such income that arises directly or indirectly to the spouse out of the transferred assets..
The term "all income", he urged, would mean the gross income from the transferred assets. After inclusion of the gross income appropriate deduction permissible to a particular individual-assessee in whose case the gross income is included would have to be allowed and, hence, he stated that deduction under section SOL of Rs. 3,000 could be allowed only once i.e., while making the assessment after including the income under Section 64. A reference was made in respect of the proposition to the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Add!. CIT [1979] 118 ITR 243. Reference was also made to the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, a decision which has been noticed by the Ahmedabad Bench of the Tribunal in the case relied on behalf of the revenue.
8. We have set out the history of the introduction of the provisions of section SOL as well as the amendments made in the provisions of Section 80B(5), which defines "gross total income". Section SOL provides for deduction where grog's total income includes income of the specified varieties. We, therefore, have to go to the provisions of Section 80B(5) to ascertain what the concept of "gross total income" implies.
According to Section 80B(5), as it originally stood, "gross total income" meant the total income computed in accordance with the various provisions of the Act without applying the provisions of Section 64 and before making deduction under Chapter VI-A, in which Section 80L fell.
Therefore, at that time when section SOL provided that where the gross total income included specified items, deduction was admissible, it clearly meant that the deduction was permissible from the income of the assessee alone and not from income from transferred assets. Therefore, the relief by way of deduction which was admissible under Section 80L would have to be only with reference to the income of the assessee excluding income from transferred assets in respect of which the question would have arisen whether separate deduction was permissible.
However, with effect from 1-4-1968, in Section 80B(5) the words "without applying the provisions of Section 64" have been excluded.
Therefore, "gross total income" is now defined as the total income computed in accordance with the provisions of the Act before making deductions under Chapter VI-A. Section 64(1) provides that in computing the total income of an individual all income from transferred assets to certain categories of persons is to be included. Therefore, in computing the total income in accordance with the provisions of the Act, it is clear that income from assets transferred to the spouse have to be included by virtue of the provisions of Section 64(1). Hence, the concept of gross total income, as it obtains at present under Section 80B(5), includes not only the income of the assessee but the income of the wife also from transferred assets, both computed in accordance with the provisions of the Act but before making the deductions under Chapter VIA. Therefore, whatever other statutory deductions may be given from the income from transferred assets of the wife at the stage of inclusion in the total income of the husband, i.e., the assessee, deductions in Chapter VI-A, in which falls section SOL, as far as wife's income from transferred assets is concerned stands ruled out.
Hence, we have got the gross total income which includes the total income computed in accordance with the provisions of the Act before allowing deduction under Chapter VI-A of incomes taxable in the hands of the husband as well as income from assets transferred to the wife by the husband. Thereafter, alone the provisions of section SOL come into play. From such gross total income, becomes permissible, deduction under section SOL, and the deduction permissible is only a maximum amount of Rs. 3,000. The question of giving a separate deduction of Rs. 3,000 in the hands of the assessee's wife before aggregating the income from transferred assets does not arise.
9. By not granting a deduction of Rs. 3,000 in the hands of the assessee's wife from interest from transferred assets the concept of real income is also not. violated. The deduction given of Rs. 3,000 under section SOL is only a statutory deduction on certain conditions being fulfilled and this does not affect the concept of what would be real income.
10. For the aforesaid reasons, we would come to the conclusion that the assessee is entitled only to deduction of Rs. 3,000 and the inclusion in the hands of the assessee of income of Rs. 4,125 from interest from transferred assets which accrued to the assessee's wife is in order.
For the sake of completeness, we may add that it is not necessary to discuss the effect of deeming provisions of Section 27(1) of the Act in relation to income from house property transferred for inadequate consideration to which there is a reference under Section 64(iv) and (v), as the conditions prevailing there are materially different.
1. While I entirely agree with the order of my learned brother, Shri George Cheriyan, 1 would like to add a few words in this connection.
2. The controversy as I understand is as to whether it is the whole of the income by way of interest at Rs. 4,125 that is required to be included under Section 64(1) .in the total income of the assessee as arising from assets transferred to his spouse or it is the said amount as reduced by the allowance of a deduction under section SOL, which the spouse would have been entitled to if it were assessed in her hands. In considering the amount liable to be included in the assessee's total income under Section 64, there is no scope for allowance of, any deduction under section SOL to arrive at the amount liable to be included under Section 64, because it is only when the disputed item of income is considered for inclusion in the total income of the wife that the question of deduction in her hands under section SOL will arise, but by virture of Section 64 any income arising to her from assets transferred by her husband requires to be treated as income of the husband only for computing his total income and does not require to be considered in the hands of the wife at all. The question of separate deduction out of such income before its inclusion in the husband's total income, therefore, does not arise. Another point to be noted is that the deduction under section SOL is not allowed in arriving at the income under any particular head or source but after computing the total income and though the measure of the allowance is fixed with reference to the income arising from any particular source it does not go to reduce the income chargeable from that source or under that head but only goes to reduce the total income as a whole. For this reason also, 1 consider the concept of real income from any particular source is not violated.