Loknath Goenka Vs CIT (Patna High Court)
The Patna High Court Full Bench answered a reference under Section 256(1) of the Income Tax Act, 1961, arising out of Taxation Case No. 126 of 1982 and Taxation Case No. 28 of 1986, regarding the temporal applicability and retrospective operation of Section 64(1)(iii) of the Act.
Material Facts & Procedural History
- In Taxation Case No. 126 of 1983 and Taxation Case No. 28 of 1986, the accounting years of the respective partnership firms closed on August 10, 1975, and December 31, 1975, prior to April 1, 1976.
- The Income Tax Appellate Tribunal, Patna Bench (ITAT), added the share income (including interest on capital) of the minor sons from the partnership firms to the total income of their assessee fathers under Section 64(1)(iii) for Assessment Year (AY) 1976–77.
- Section 64(1)(iii) was introduced by the Taxation Law (Amendment) Act, 1975, with effect from April 1, 1976.
- The tax authorities initially relied on the Patna High Court Division Bench precedent in Badri Prasad vs. CIT (1990), which held that the law in force on April 1, 1976 (the start of AY 1976–77) applied, thereby validating the addition of minor sons’ share income for AY 1976–77.
- During proceedings in Tax Case No. 28 of 1986, the assessee relied on the Supreme Court ruling in Kesoram Industries, arguing that tax liability hinges on the date of accrual during the accounting year. Noting that Kesoram Industries was not considered in Badri Prasad, the Division Bench referred the issue to a Larger/Full Bench on May 8, 1996. Tax Case No. 126 of 1982 was similarly referred.
Legal Issues & Statutory Provisions
- Section 64(1)(iii) of the Income Tax Act, 1961: Whether the share income of minor children admitted to partnership benefits can be included in the parent’s total income for AY 1976–77 when the relevant accounting year ended prior to the provision’s effective date of April 1, 1976.
- Retrospectivity of Substantive Tax Liabilities: Whether a newly introduced substantive tax liability applies based on the date of income accrual during the accounting year or the law existing at the time of assessment.
Parties’ Submissions
- Assessee’s Submissions (via Amicus Curiae):
- The Amending Act introducing Section 64(1)(iii) came into force on April 1, 1976.
- Tax liability must be determined based on the law existing when the income accrued. The accounting years closed prior to April 1, 1976 (in FY 1975–76).
- Creating a new substantive liability cannot be given retrospective effect to cover income accrued in an accounting year that ended before the enactment took effect.
- Revenue’s Submissions:
- Supported the view in Badri Prasad, arguing that the law in force on the first day of the assessment year (April 1, 1976) governs the assessment for AY 1976–77, making the time of income accrual during the preceding accounting year irrelevant.
Court Observations & Findings
- The Full Bench analyzed Supreme Court rulings in Karimtharuvi Tea Estate Ltd. and Kesoram Industries.
- The Court distinguished between annual Finance Acts (which prescribe or quantify rates for existing liabilities) and statutory amendments that create entirely new substantive liabilities.
- Under Section 3 of the Income Tax Act, tax liability is a present debt that accrues and becomes perfected on the last day of the relevant accounting year.
- A new substantive tax liability created under Section 64(1)(iii) cannot operate retrospectively. Because Section 64(1)(iii) took effect on April 1, 1976, it applies to income accruing in the financial year 1976–77, which corresponds to AY 1977–78, and cannot be applied to the accounting year 1975–76 (AY 1976–77).
- The Full Bench explicitly concluded that the earlier Division Bench decision in Badri Prasad vs. CIT (1990) did not lay down the correct law.
Directions & Final Decision
- The Full Bench resolved the legal reference by ruling that the date of accrual of income is relevant for determining liability under newly created statutory provisions, and Section 64(1)(iii) could not be applied retrospectively to AY 1976–77 for accounting periods ending prior to April 1, 1976.
- The matters were remanded back to the Division Bench for final disposal in accordance with the Full Bench’s clarification of the law.
Cases Discussed
- Badri Prasad & ors. vs. Commissioner of Income Tax (Patna High Court), (1990) Volume 185 ITR 307
- Maneklal Vallabhdas Parikh and Sons v. CIT (Gujarat High Court), [1969] 72 ITR 637
- Karimtharuvi Tea Estate Ltd. v. State of Kerala (Supreme Court), [1966] 60 ITR 262 / AIR 1966 SC 1385
- Kesoram Industries and Cotton Mills Ltd. vs. Wealth Tax Commissioner (Central), Calcutta (Supreme Court), AIR 1966 SC 1370
Five Alternative SEO Titles
Patna HC Full Bench Overrules Badri Prasad Precedent on Retrospective Tax Liability
Patna HC Rules Section 64(1)(iii) Child Income Inclusion Inapplicable to Prior Accounting Periods
Patna HC Settles Section 64(1)(iii) Applicability Based on Date of Income Accrual
Patna HC Remands Assessment Reference Holding Substantive Tax Amendments Cannot Apply Retrospectively
Patna HC Clarifies Section 64(1)(iii) Minor Share Income Addition Applies Prospectively From AY 1977–78
FULL TEXT OF THE JUDGMENT/ORDER OF PATNA HIGH COURT
These two cases arise from a reference made by the Income Tax Tribunal, Patna Bench, Patna under Section 256(i) of the Income Tax Act, 1961 (hereinafter referred as as ‘the Act’).
2. The point for consideration in the reference is whether the Appellate Tribunal was correct in law in holding that the share income of minor sons of the assessees, including the share in interest on capital credited to the minor sons out of the partnership firm was to be computed in the hands of their father under Section 64(1)(iii) in the Assessment year 1976-77. The said provision was introduced in the Income Tax Act by the Taxation Law (Amendment) Act 1975 with effect from 1.4.1976, whereas the accounting year of the assessee(s) in the instant case(s) came to an end on 10.8.1975 and on 31.12.1975 in Taxation Case No. 126 of 1983 and Taxation Case No. 28 of 1986 respectively.
3. The authorities were of the opinion that the question was answered by a Division Bench decision rendered in the case of Badri Prasad & ors. vs. Commissioner of Income Tax (1990) Volume 185 ITR 307, which concluded the issue in the following terms:-
“It is a cardinal principle of tax laws that the law to be applied is that which is in force at the commencement of the assessment year. (See Karimtharuvi Tea Estate Ltd. v. State of Kerala [1966] 60 ITR 262 (SC) and Maneklal Vallabhdas Parikh and Sons v. CIT [1969] 72 ITR 637 (Guj).
In the instant case, the assessment year is 197677. Therefore, the law in force on April 1, 1976, would govern the assessment for the assessment year in question.
The Tribunal, in our opinion, was right in holding that the share income of the minor sons from the firm to which they were admitted as partners was assessable in the hands of their fathers by virtue of the provisions of Section 64(1)(iii) of the Act as amended from April 1, 1976 by the Taxation Law (Amendment) Act, 1975
Our answer to the question referred to this
Court is, therefore, in the affirmative and against the assessees.”
4. It is when the issue arose for consideration in these two cases before the Division Bench that the decision of the Apex Court in the case of Kesoram Industries and Cotton Mills Ltd, vs. Wealth Tax Commissioner (Central), Calcutta, reported in AIR 1966 SC 1370 was relied upon by Counsel for the assessee to contend that the liability to pay income tax hinges on accrual of income and has no concern with the time when computation is made by the taxing authority. It was the submission of learned Counsel that the decision in the case of Kesoram Industries (supra) was not considered by the Division Bench which decided the case of Badri Prasad (supra).
5. It is bearing note of such circumstances the Division Bench, which was considering Tax Case No. 28 of 1986, referred the issue for consideration to a larger Bench by an order dated 8.5.1996.
6. It is under Section 256(i) of the Income Tax Act, the Income Tax Tribunal Patna Bench had earlier in the year 1982, referred the same question for opinion of this Court, which remained pending consideration in the proceedings arising out of Tax Case No. 126 of 1982 and it is bearing note of the earlier order in Tax Case No. 28 of 1986 that the Division Bench which was considering Tax Case No. 126 of 1982, also referred the same question to a larger Bench.
7. Accordingly both matters are before us for answering the reference.
8. The entire issue arises on the scope and applicability of Section 64(1)(iii) of the Act. This Court would therefore consider it useful to quote relevant provisions which reads as under :-
“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.
….. ……… ………… …………..
(iii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm….”
9. The admitted facts are that in both the instant cases, the accounting year of the firm had closed much prior to coming into force of Section 64(1)(iii). In spite of the accounting year having closed prior to coming into force of Section 64(1)(iii) with effect from 1.4.1976, the Income Tax Tribunal added the share income of the minor sons from the partnership firm at the hands of the income of the assessee father under Section 64(1)(iii) of the Act.
10. D. V. Pathy has assisted the Court on behalf of the assessee in Tax Case No. 126 of 1982. In spite of valid service of notice upon the assessee in Tax Case No. 28 of 1986 none appeared on behalf of the assessee. In the circumstances, this Court has requested Mr. Pathy to appear as Amicus Curiae in Tax Case No. 28 of 1986 also. We have also heard Mr. Rishi Raj Sinha, learned Senior Standing Counsel on behalf of the department.
11. The issues in both the cases are one and the same.
12. Pathy appearing on behalf of the assessee in both the matters has submitted that the provisions of the Amending Act have come into force with effect from the date specified in the notification issued under Section 2 of the Amendment Act i.e. with effect from 1.4.1976. It is his submission that even if the share income of the minor accrued prior thereto, the same was liable to be added in the income of the parent, for the purpose of computing taxable income of the father in compliance with the provisions contained in Section 64(i)(iii) of the Amendment Act.
13. Learned Counsel have placed reliance on the judgment rendered in the case of Badri Prasad (supra), the relevant extract of which has been extracted hereinabove at paragraph 3. It is their submission that in view of the consideration and opinion expressed by the Division Bench in the case of Badri Prasad (supra), the issue now stands settled. It is canvassed that irrespective of the fact that the Taxation Law Amendment Act has come into force with effect from 1.4.1976 and irrespective of the fact that the accounting year of both the assessees had closed prior thereto, the income of the minor children of the assesses was liable to be added at the hands of their father while computing his total income.
14. As per submissions of Mr. Pathy, the law applicable on the date of assessment is relevant for ascertaining the tax liability. He submits that the time of accrual of income is irrelevant for the purpose of applicability of the Amending Act. Irrespective of the fact that income has accrued and accounting year of the assessee has come to an end prior to 1.4.1976, the Amending Act which came into force with effect from 1.4.1976 will apply to arrive at the taxable income of the assessee in the accounting year 1976-77 corresponding to accounting year 1975-76. According to him, para 8 of the Constitution Bench judgment of the Apex Court in Karimtharuvi Tea Estate Ltd Versus State of Kerala, reported in AIR 1966 SC 1385 which has been relied upon in the case of Badri Prasad (supra) supports his contention.
Para 8 of the judgment in the case of Karimtharuvi Tea Estate Ltd (supra) reads as follows:-
“Now, it is well settled that the Income Tax Act, as it stands amended on the first day of April of any financial year must apply to the assessment of that year. Any amendments in the Act which come into force after the first day of April of a financial year, would not apply to the assessment for that year, even if the assessment is actually made after the amendments came into force.”
15. In the opinion of this court, the legal position settled by the Constitution Bench, is neither as appreciated by the Division Bench in the case of Badri Prasad (supra) nor as canvassed by Mr. Pathy. In fact what the Constitution Bench has settled is that if an amendment takes place on lst of April of any financial year, it would apply to the assessment held for that financial year but not if the amendment comes into force after the start of the financial year on lst of April in which case it would take effect on the next assessment year. By applying the said law to the facts of the two cases under reference, it is seen that the provisions of the Amending Act came into force on the first day of April of the financial year 1976-77. As per the legal position settled in para 8 of the judgment in the case of Karimtharuvi Tea Estate Ltd. (supra), the amendment would apply to the assessment to be held for the financial year 1976-77 i.e. the assessment year 1977-78. This is the irresistible conclusion reached by applying the law laid down by the Apex Court in para 8 of the Constitution Bench judgment in the case of Karimtharuvi Tea Estate Ltd (supra).
16. The earlier judgment of the Apex Court in the case of Kesoram Industries (supra) decided on 24.11.1965 is in line with the Constitution Bench judgment of the Supreme Court in Karimtharuvi Tea Estate Ltd (supra) decided on 15.12.1965. The relevant extract of the judgment of the Apex Court in Kesoram Industries (supra) is as follows:-
26. Uninfluenced by judicial decisions let us at the out-set look at the relevant provisions of the two Acts. Under Section 3 of the Income Tax Act, where any Central Act enacts that income tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, the said Act. The expression “charged” is used both in the case of the Central Act i.e. the Finance Act, and the Income Tax Act. It could not have been the intention of the Legislature to charge the income to income tax under two Acts. Necessarily, therefore, they are used in two different senses. The tax is to be charged for that year in accordance with, and subject to, the provisions of the Income Tax Act; but the said charge will be in accordance with the rates prescribed under the Finance Act. This construction will harmonize the apparent conflict between the two Acts. When you look at Section 2 of the Finance Act, it shows that income tax shall be charged at the rates specified in Part I of the First Schedule, and super tax, for purpose of Section 55 of the Income Tax Act, 1922, shall be charged at the rates specified in Part II of the First Schedule. The primary object of the Finance Act is only to prescribe the rates so that the tax can be charged under the Income Tax Act. The Income Tax Act is a permanent Act whereas the Finance Act is passed every year and its main purpose is to fix the rates to be charged under the Income Tax Act for that year. That should be the construction is also made clear by Section 55 of the Income Tax Act, whereunder super tax shall be charged for any year in respect of the total income of the previous year of any individual, Hindu undivided family, company etc. at the rate or rates laid down for that year by a Central Act. This section brings out the distinction between a tax charged and the rate at which it is charged. This construction is also emphasized by Section 67-B of the Income Tax Act, whereunder if on the 1st day of April in any year provision has not yet been made by a Central Act for the charging of income tax for that year, the Income Tax Act shall nevertheless have effect until such provision is so made as if the provision in force in the preceding year or the provision proposed in the Bill then before Parliament, whichever is more favourable to the assessee, was actually in force. This shows that the charging section is only Section 3 of the Income Tax Act; and that Section 2 of the Finance Act only gives the rate for quantifying the tax; for, this section gives an alternative for quantification in the contingency the of the Finance Act not having been made on the 1st day of April of that year. Even if such an Act was made, the charge under the Income Tax Act could be imposed and worked out only in terms of the provisions of the Income Tax Act. If that be the construction, the conclusion will flow that the tax liability at the latest will arise on the last day of the accounting year.
33. To summarize: A debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in praesenti or in futuro: debitum in praesenti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened. A liability to pay income tax is a present liability though it becomes payable after it is quantified in accordance with ascertainable data. There is a perfected debt at any rate on the last day of the accounting year and not a contingent liability. The rate is always easily ascertainable. If the Finance Act is passed, it is the rate fixed by that Act; if the Finance Act has not yet been passed, it is the rate proposed in the Finance Bill pending before Parliament or the rate in force in the preceding year, whichever is more favourable to the assessee. All the ingredients of a “debt” are present. It is a present liability of an ascertainable amount.
36. For the reasons we have stated earlier, we agree with the conclusion arrived at by the Gujarat High Court. We, therefore, hold that the liability to pay income tax is a debt within the meaning of Section 2(m) of the Wealth Tax Act and it arises on the valuation date during the accounting year.
17. Reading the judgment of the Apex Court in the case of Kesoram Industries and Cotton Mills Ltd. harmoniously with the Constitution Bench judgment of the Apex Court in the case of Karimtharuvi Tea Estate Ltd (supra), this Court would observe that the argument advanced by Counsel for the assessees (Amicus Curriae) as well as the Department can be made only in respect of a rate prescribed under a Finance Act or an Act providing a surcharge if the same is brought into force on the lst of April of the assessment year in which assessment for the previous year is being done as the same would only provide for ascertaining the rate, for existing liability under the Income Tax Act. But that is not the case here. Under the new provision, i.e. Section 64(1)(iii) a new liability has been prescribed and not the rate for ascertaining the liability. Such new liability under the Income Tax Act cnnot be given a retrospective effect. Such liability can only be fastened on an individual if the same was existing at the time of accrual and not at the time of assessment. The observations of the Apex Court in paragraph 33 of the judgment in the case of Keshoram Industries and Cotton Mills (supra), clarifies this position.
18. In view of the judgments of the Apex Court in the case of Keshoram Industries (supra) as well as Karimtharuvi Tea Estate Ltd (supra) this Court would have no hesitation in holding that for deciding the liability of a particular provision of the Income Tax Act, the date of accrual of income would be relevant. If the provision comes into force in a particular financial year, it would apply to the assessment for that year but cannot be made applicable in respect of assessment for a previous year.
19. The Amending Act introduced a new Section 64(1) (iii) in the Income Tax Act with effect from 1.4.1976. The tax liability under the said provision could therefore be charged on the assessee, in the assessment which was to be made for that accounting year i.e. 1976-77, which would be done in the assessment year 1977-78. The Amending Act introducing a new tax liability which came into force with effect from 1.4.1976 could not be given a retrospectivity and be made applicable to the previous accounting year i.e. 1975-76 corresponding to the assessment year i.e. 1976-77.
20. In view of the foregoing discussions and conclusions arrived at by us, I am of the considered opinion that the judgment rendered in the case of Badri Prasad (supra) does not lay down the correct law.
21. The issue of law having been clarified as aforesaid the reference stands answered. The matter is remanded to the Division Bench for disposing of the matter in terms of the law as considered by the Full Bench in the instant proceeding.
