The Commissioner of Income Tax, Bangalore v. Sri J.H. Gotla, Yadagiri

The case makes it clear that the Court indeed has the power to interpret a statute if the strict wordings produce an unjust result or one that isn’t the intent of the Parliament; however, the Courts should be more cautious and strict in their interpretations when it comes to fiscal or taxing provisions.
CITATION1985 AIR 1698
COURTSupreme Court of India
JUDGES/CORAMJustice Sabyasachi Mukharji
DATE OF JUDGEMENT29.08.1985

Introduction

In the present case, the Apex Court while discussing Sections 16(3) and 24(2) of the Income Tax Act, made some important observations about interpretation of statues, “The task of interpretation of a statutory provision is an attempt to discover the intention of the Legislature from the language used. It is necessary to remember that language is at best an imperfect instrument for the expression of human intention. It is well to remember the warning administered by judge Learned Hand that one should not make fortress out of dictionary but remember that statutes always have some purpose or object to accomplish and sympathetic and imaginative discovery is the surest guide to their meaning.”

Facts

The facts of the case are as follows: The assessee in this case was an individual and he was carrying on business in the relevant assessment years in purchase and sale of ground-nut oil and was also running an oil mill. He was also an abkari contractor.

On 01.06.1957, he had gifted away a part of the oil mill machinery, viz., a solvent extraction plant, to his wife and three minor children. A firm was constituted by the assessee’s wife and another person, to the profits of which the three minor sons of the assessee were also admitted.

The mill premises as well as the remaining machinery of the assessee were leased out to this firm, which carried on the business of the manufacture and sale of ground-nut oil. The assessee also entered into an agreement with the firm under which certain services were rendered to the firm by way of management. The assessee was entitled to get commission at the stipulated rates on the purchase of oil cake and sale of decoiled cake made by the firm.

The assessee himself continued to carry on business in purchase and sale of ground-nut cake and oil on a small scale. The assessee also continued his business as abkari contractor. Subsequently, he incurred huge losses in his individual business in the earlier years which were being carried forward from year to year up to the assessment year 1958-59. The income of the assessee’s wife and minor children from the firm was included in the computation of the total income of the assessee under Section 16(3) of the Income Tax Act for the assessment year 1959-60 and he claimed set off of the loss carried forward from the assessment year 1958-59 against the profits of his own business as also the share income of his wife and minor children. However, this claim was rejected by the Income Tax Officer.

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Issues

The main issue in the case was: Whether or not, on the facts and in the circumstances of the case, an assessee would be entitled to carry forward and set off the losses against the share income of the assessee’s wife and minor children in respect of the assessment year 1959-60, 1960-61 and 1961-62 under Section 24(2) of the Income Tax Act, 1922?

Summary of court decision and Judgement

On the appeals preferred by the assessee, the Appellate Assistant Commissioner allowed the set off claimed on the ground that the assessee himself is deemed to be carrying on the business from which the share income was derived by his wife and minor children.

Upon appeal by the Revenue, the Income Tax Appellate Tribunal held that the assessee was not entitled under Section 24 (2) of the Act to claim set off of his losses against the income of his wife and minor children. Upon reference, the High Court observed that for an assessee to be entitled to carry forward the loss to the following year and to claim set off, the following conditions had to be fulfilled:

  1. The loss must be in a business;
  2. The business, profession or vocation in which the loss was originally sustained must be continued to be carried on by the assessee in the year in which the carried forward loss is sought to be set off; and,
  3. The business, profession or vocation against the profit of which set off is claimed must be carried on by the assessee in that year.

The High Court thus ruled in favour of the assessee. The revenue appealed against this and the Supreme Court observed:

  1. Where the plain literal interpretation of a statutory provision produces a manifestly unjust result, which could never have been intended by the legislature, the Court might modify the language used by the legislature so as to achieve the intention of the legislature and produce a rational construction; and,
  2. The object of Section 16(3) has to be read along with Section 24(2) in the present case. Where the wife or minor child carry on a running business, the right to carry forward the losses in the running business would be available to the wife or minor child if they themselves were assessed but the right would be completely lost if the individual in whose total income the loss is to be included is not permitted to carry forward the loss under Section 24(2) since that would be the result of the strict literal construction it is apparent that that could not have been the intent of the Parliament. Therefore, where Section 16(3) of the Act operates, the profits or 1oss from a business of the wife or minor child included in the total income of the assessee should be treated as the profit or loss from a ‘business carried on by him’ for the purpose of carrying forward and set off such loss under Section 24(2) of the Act.
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The Apex Court thus dismissed the appeal.

Analysis

It is pertinent to note that the view expressed by this Court with respect to interpretation of statutes, is similar to the view taken by Court in many different cases.

The primary function of the courts while interpreting or construing a statute is to see the intention of the legislature. Judiciary is duty bound to act upon the true intention of the legislature. The maxim “Judicisest jusdicere, non dare’’ pithily expounds the duty of the Court. It is to decide what the law is and apply it, not to make.[1]

It has been held in various cases[2] that the rule of interpretation should only be used so that the words used in the statute do not manifest the intention of the legislature. The need of interpretation arises only when the words used in the statute on their own term, ambivalent and do not manifest the intention of legislature.

However, in the case of GEM Granites v. CIT[3], the Hon’ble Court observed that what one may believe or think to be the intention of Parliament cannot prevail if the language of the statute does not support that view, thus object of the statute has to be gathered from language and not on what one believes or thinks.

Further, it has also been held that in case of a taxing/fiscal provision, one must have regard to the strict letter of law.[4]

Conclusion

After reading the present case as well as the other legal precedents on interpretation of statutes, it is clear that the Court indeed has the power to interpret a statute if the strict wordings produce an unjust result or one that isn’t the intent of the Parliament; however, the Courts should be more cautious and strict in their interpretations when it comes to fiscal or taxing provisions.

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[1]ACIT v. Velliappa Textiles Ltd.,(2003) 263 ITR 550 (SC).

[2]Keshavji Ravji & Co. v. CIT,(1990) 183 ITR 1 (SC); Pandian Chemicals Ltd. v. CIT,(2003) 262 ITR 278 (SC); Doypack Systems Pvt. Ltd. v. UOI,1998 (2) SCC 299.

[3](2004) 271 ITR 322 (SC). 

[4]CIT v. Vadilal Lallubhai, (1972) 86 ITR 2 (SC); A.V. Fernandez v. State of Kerala, AIR 1957 SC 657.