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Judgment
Thakkar, J.—"Till death doth us part" - the oath uttered at the time of solemnization of marriage may have to be altered into "till the income tax authorities doth us part" by the medicos who marry and intend to carry on their professional activities in partnership. That cannot be helped if the interpretation placed by the Appellate Tribunal in respect of the provision popular known as the "clubbing provision" embodied in section 64(1)(i) of the income tax Act, 1961 ("the Act") is untenable as is canvassed by the revenue. The said provision speaks as under: "(1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly-
(i) to the spouse of such individual from the membership of the spouse in a firm carrying on a business in which such individual is a partner;"
In essence it provide that when the husband and the wife are members of the very same partnership firm carrying on a business, the income of the two is to be clubbed together. Insofar as the income arising directly or indirectly from the business of the partnership is concerned, such clubbing together would naturally result in a higher rate of tax being attracted having regard to the fact that income tax at a higher rate is levied in regard to the slab of income which is in the higher bracket. The assessee is, therefore, interested in escaping the clutches of this provision. The revenue on the other hand would be anxious to call into aid this provision in case any question of interpretation arises which would result in an assessee being in a position to successfully contend that the provision would not be attracted in his case. Such a question has arisen in the context of a partnership firm between two spouses who happen to be professionals. Each of them is a qualified medical practitioner (a doctor). The husband and the wife team of doctors, have formed a partnership, and are carrying on their professional activities in partnership. The activities, inter alia, consist of a running of a Nursing Home where the patients under treatment of the team of doctors are admitted as indoor patients and the income from the Nursing Home also forms a part of the professional income of the partnership firm. The assessee contended that the clubbing provision contained in section 64(1)(i) would be attracted provided and only provided the basic pre-condition, envisioned by the provision, namely, that the two spouses must be members of a partnership firm ''''carrying on a business" is satisfied. The expression "carrying on a business" has been placed under spotlight and it has been contended that when a doctor husband and a doctor wife carry on their "profession" in partnership, it cannot be said that they are "carrying on a business". If the contention is right, the assessees must succeed. Otherwise the revenue would be justified in clubbing together their income. It appears that a similar question on similar facts has arisen in the cases of a number of doctor couples carrying on their profession in partnership. In the case of a couple from Godhra the question arose in three successive years, viz., 1972-73, 1973-74 and 1974-75. The Tribunal upheld the contention of the assessee-couple that the provision in question was not attracted because they were partners in a firm carrying on "profession" and not partners in a firm "carrying on business". Thereupon, three allied references have been made at the instance of the revenue. In IT Reference Nos. 193/78 and 113/79 we are concerned with the case of the doctor husband who has succeeded in respect of assessment for the aforesaid three years. In IT Reference No. 154/78 we are concerned with the doctor wife who has also succeeded before the Tribunal. All these three references will be disposed of by this common judgment. We will also dispose of two IT Application Nos. 151/81 and 159/81, pertaining to another doctor couple from Ahmedabad in respect of two successive years 1974-75 and 1975-76. These applications have been made by the Commissioner with a view to invoke the jurisdiction of this Court u/s 256(2) in order to require the Tribunal to state the case and refer the question to us. A reference is sought by the Commissioner in the case of a doctor couple from Bhuj [IT Application No. 167/81]. If we negative the plea of the revenue that the Tribunal was wrong in holding that the provision concerned would not be attracted in the case of a husband and wife couple carrying on a "profession" in partnership, these three applications must of necessity fail. That is why these three applications have been tagged on and are being disposed of along with the aforesaid three references. These three IT Applications will also be disposed of by this common judgment.
For the purposes of this present judgment it will be sufficient to advert to the facts giving rise to IT Reference No. 193/78 which may be treated as typical for the entire group. The facts pertaining to each of these matters need not, therefore, be unnecessarily stated. In the allied references and the IT Applications an identical question of law arises on similar facts.
The following facts are not in dispute:
The assessee Dr. K.K. Shah is a qualified Gynecologist. His wife Dr. Mrs. Haribala K. Shah is also a qualified Gynecologist.
Both of them are carrying on their profession as Gynecologists in partnership with each other under the name and style of Sevashram Hospital.
They are also running a nursing home for the purposes of carrying on their profession.
Patients are admitted to this nursing home and are treated by the doctor couple.
It is not the case of the revenue that any patient other than the patients treated by one or other of the partners is admitted as a patient.
Nor is it the case of the revenue that any other activity not wholly connected with the activity pertaining to the medical practice of the two doctors is carried on in partnership. For instance it is not the case of the revenue that Sevashram Hospital also runs a chemist''s shop as a partnership activity where drugs are sold to patients.
The last mentioned factor requires to be highlighted because in such an event the profits attributable to that branch of the activity would require to be accorded a different treatment. No such question arises in the present reference or in the allied reference wherein doctor couples are carrying on their profession which consists of treating their patients, acting as consultants performing operations, and creating them as indoor patients in the nursing home, which is run exclusively for the purpose of treatment of the patients under the treatment of the doctor couple.
Before we deal with this question in the context of section 64(1)(i), it is necessary to trace the history of the relevant provision as it existed prior to the enactment of the said Act, i.e., in the context of the Indian income tax Act, 1922 ("the 1922 Act") which was replaced by the 1961 Act. The corresponding provision in the 1922 Act was contained in section 16(3). These provisions require to be reproduced in juxtaposition.
Section 16 of the 1922 Act
Section 64 of the 1961 Act
(3) In computing the total income of any individual for the purpose of assessment, there shall be included�
(1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly�
(a) so much of the income of a wife or minor child of such individual as arises directly or indirectly�
(i) from the membership of the wife in a firm of which her husband is a partner; (Emphasis added)
(i) to the spouse of such individual from the membership of the spouse in a firm carrying on a business in which such individual is a partner;
It is necessary to stress the circumstances that section 16(3)(a)(i) of the 1922 Act has undergone a metamorphosis in the corresponding provision contained in section 64(1)(i) of the 1961 Act. An analytical study of these provisions would reveal the following features :
Section 16(3)(a)(i) of the 1922 Act provides for the clubbing together of the income of the wife with the income of the husband when the income of the wife is derived directly or indirectly (what follows is of great significance) "in a firm of which her husband is a partner". In other words, the mere membership of the firm on the part of a wife would attract the clubbing provision and the income arising to the wife from the firm would be clubbed with the income of her husband.
As against this, under the corresponding provision in section 64(1)(i) of the 1961 Act (the clubbing provision) has introduced the concept of income arising to a spouse in a firm carrying on a business. The expression "membership of the spouse in a firm carrying on a business" requires to be under-scored with red ink.
Under the 1922 Act the mere member ship of the wife in a firm was sufficient to attract the clubbing provision. Under the 1961 Act the Legislature has made the applicability of the clubbing provision dependent on the spouse deriving income not in "any firm" but in a "firm carrying on business". The expression "membership of a firm" has been replaced by the expression "membership in a firm carrying on business". Is this change a merely incidental change or is it a change which is introduced with some deliberate design or purpose, is a relevant question to ask. It is pertinent to pose this question because the expression "a firm carrying on business" is not interchangeable with the expression "of a firm". The rider added in the corresponding provision in the new Act pertains to the carrying on of "business". Is it merely an amplification of the earlier provision, a mere elaboration of the earlier provision, or is it purposeful change introduced by the Legislature? To this question we must now address ourselves. The expression "business" has been employed by the Legislature in order to emphasise the distinction between a business and a profession. The Legislature in enacting the 1922 Act as also the 1961 Act has shown great awareness about the distinction between the concept of a "business" and that of a "profession" and has accorded different treatment depending on whether the activity falls within description of "business" or "profession". This distinction between the two concepts has been projected in some of the provisions of the Act as we shall presently point out :
1961 Act
1922 Act
"Business" is defined by section 2(13) as under :
" ''business'' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture;"
The expression "profession" has been defined by section 2(36) as under :
" ''profession'' includes vocation ;"
It takes within its sweep the expression "vocation".
"Business" is defined by section 2(4) as under :
" ''business'' includes any trade, commerce, or maunfacture or any adventure or concern in the nature of trade, commerce or manufacture;"
The expression "profession" has not been defined.
Section 28 which is the charging section treats professional income as of a different category from that of business income as is evident from the opening words :
The following income shall be chargeable to income tax under the head ''Profits and gains of business or profession'' :
(i) the profits and gains of any business or profession which was carried on by assessee at any time during the previous year;
(ii) ****
(iii) income derived by a trade, professional or similar, association from specific services performed for its members ;
(iv)the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of a profession.
Explanation 1 [Emphasis added] refers to profits of business only in the context of profits of managing agency.
Explanation 2 refers to ''business'' only in regard to speculative transactions.
Note: The expression "vocation" employed by section 10(1) of the 1922 Act is omitted and "vocation" is included in the definition of "profession" [ see sec . 2(36)]. Section 29 refers to method of computation of profits from business or profession.
Section 10(1) refers to business, profession or vocation.
Notes : In the 1961 Act the expression "vocation" is omitted and is brought wilhin the ambit of the expression "profession" which is defined for the first time by section 2(36).
That is why it has considerable importance to find out whether the intendment and purpose of the Legislature in introducing the new concept of a firm carrying on a "business" in the 1961 Act in order to replace the existing concept of a mere firm in the corresponding provision of the 1922 Act assumes importance. It assumes importance because the provision is a provision pertaining to the clubbing of the income of two partners by reason of the "relationship" between them. Ordinarily the income of the partners in a firm would be assessed independently. There would be no question of clubbing together. The provision for clubbing together was introduced in the 1922 Act presumably in order to prevent evasion of tax. It is not difficult to visualise a husband forming a partnership with a wife so that the income would be distributed and both of them may escape the tax net altogether in the event of their income falling below the exempt line or at any rate would attract tax at a much lower rate having regard to the fact that the scheme of taxation is such that a higher rate of tax is applicable to income falling within the higher slab in the case of an assessee. An individual can form a partnership with his wife regardless of the fact that the wife may have no capacity to make any contribution in running the business. She may be an altogether illiterate wife, who does no more than engage herself in the domestic chores. And by and large such would be the case in the case of a large number of assessees in India having regard to the structure of the society as it has existed for a number of years. She would be only a nominal or a notional partner who has been a partner only for the sake of escaping the rigour of tax liability. It must be realised that when an individual forms a partnership with a stranger, even if the stranger agrees to be a nominal partner, the person who enters into such arrangement runs a risk because the stranger may assert his right and may not agree to make over the amount falling to his share to the real partner. There would be no such risk when a wife is introduced as a partner. That is conceivably the reason why section 16(3)(a)(i) has introduced the clubbing provision. The situation, however, would be altogether different when a professional couple, say a doctor couple, enters into a partnership. Each of the two can carry on his or her profession in his or her individual capacity. Each of them can also enter into a partnership with other members of the same profession. In that event their professional income could be assessed separately and no question of clubbing would arise. It must also be realised that a doctor husband cannot form a partnership with a wife who is not a doctor in order to carry on his profession. The rules of professional ethics would not permit this. It would be unethical to do so and he would run the risk of being debarred from practice. It would not also be recognised by law. But when both of them are qualified doctors and they join in partnership there is practically no risk of the partnership coming into existence being a nominal one. As mentioned earlier, in a business partnership the husband may be an astute businessman and the wife may be no more than an illiterate housewife or a housewife who is not capable of carrying on an economic activity on her own. On her own the wife may not be able to earn any income or make any partner in a partnership firm in a business. It is here that the aspect regarding the difference in the situation in the context of a doctor husband and a doctor wife would require to be emphasised. A doctor wife is capable of carrying on her own profession say as a Gynecologist and earn her own income. It would be unreasonable to make her pay tax at a higher rate merely because she carries on an activity in partnership with her doctor husband.
Again, so far as the businessman''s wife is concerned, nobody would ever accept her as a partner and give her a share in the profits if she is herself not capable of carrying on a business and making any worthwhile contribution in the business activity. As against this, the doctor wife of a doctor husband can enter into partnership with any other doctor and carry on the professional activity. There would be no reluctance on the part of another doctor to take her in as a partner because she would be fully qualified and can share the work and contribute her talent in the profession in order to secure income for the firm. Thus, the raison deter for clubbing together the income of non-professionals does not exist in the case of professionals. It is this aspect which was presumably realised and that is why in the new Act a change was introduced by providing that the provision would be attracted only in the case of spouses carrying on a business in partnership and not in the case of spouses who do not carry on business (but carry on profession) in partnership. And it is now worthwhile to reproduce an extract from the speech of the Finance Minister made on the floor of the House at the time of introducing the income tax Bill, 1961. We will refer to that part of the speech which pertains to the clubbing provision under the 1922 Act and the change sought to be introduced in this sphere by the 1961 Act. The speech has been reproduced on page 33 of Treatise on the income tax Act, 1961 by S.C. Manchanda, K. Srinivasan and B. Mallik in Vol. I of the first edition of 1962. The relevant extract from page 37 may be quoted:
"A provision which will be of interest to persons engaged in the professions is that in clause 64. Under the existing law, if a husband and wife are partners in the same firm, the share income of the wife is clubbed with that of the husband, who has to pay tax on the income so aggregated. The Law Commission has expressed itself against this provision as applied to partnerships between husband and wife engaged in professions as doctors, lawyers, etc. The Commission has recommended that such cases should be exempt from the operation of this provision. The Government has accepted this suggestion and the provision has been suitably modified."
[Emphasis added]
Two salient features required to be highlighted are :
(1) that the Law Commission has expressed the opinion that the clubbing provision should not be applied to the husband and wife partnerships engaged in professions such as doctors, lawyers, etc., and
(2) that the Government had accepted this suggestion and had suitably modified the clubbing provision. Thus, it is evident that the change reflected in the clubbing provision in the 1961 Act is not a mere casual change of phraseology or an incidental or a purposeless change in phraseology without any design or purpose. It is a change introduced with open eyes and with full awareness of the need to exempt professional couples carrying on their profession in a partnership firm from the clutches of the clubbing provision. There was a deliberate design and purpose in introducing the new concept of a spouse carrying on a "business" in place of the old concept of a membership of a spouse in partnership regardless of the nature of the activity carried on. The intendment and the purpose of the legislation and the drift of the legislative mind is manifest. It was intended to exclude spouses carrying on professional activity from the purview of the clubbing provision. Incidentally, we may advert to the content of the expression "professional activity" as interpreted by the Supreme Court in Dr. Devendra Surd, In re AIR 1969 SC 63. Says the Supreme Court :
"There is a fundamental distinction between a professional activity and an activity of a commercial character. A ''profession'' involves the idea of an occupation requiring either purely intellectual skill, or of manual skill controlled, as in painting and sculpture, or surgery, by the intellectual skill of the operator, as distinguished from an occupation which is substantially the production or sale or arrangements for the production or sale of commodities. A professional activity must, therefore, be an activity carried on by an individual by his personal skill and intelligence and unless the profession carried on by a person also partakes of the character of a commercial nature, the professional activity cannot be said to be an activity of a commercial character."
We are, therefore, of the opinion that when professional couples such as a doctor husband and a doctor wife or a lawyer husband and a lawyer wife or an architect husband and an architect wife form a partnership for the purpose of carrying on a professional activity which would fall within the scope of the interpretation in Dr. Devendra Surti''s case (supra) their income is not liable to be clubbed together u/s 64(1)(i). We would, however, add the following riders:
If a doctor husband and a doctor wife are also carrying on the activity of a nursing home in the context of their professional activity for the purpose of treating their own patients, the income from the nursing home can be treated as the professional income of the professional couple and no question of clubbing together can arise.
If any business activity is carried on by a firm constituted by the doctor husband or doctor wife such as of running a drug store for selling drugs to the patients or to others, the income from such activity can be clubbed together. Such income will not be exempt from being clubbed together merely because it is an activity which is adjunct to the main professional activity. Similarly when a doctor couple carries on the nursing home activity by admitting patients of other doctors and charging fees such as room fees or fees for services rendered on by the firm, that part of the income can be clubbed together.
Merely because a part of the activity is professional activity, the assessee cannot escape the clutches of the clubbing provision even in respect of its income which can be said to be an income arising in the context of his business activities as distinguished from professional activities.
Accordingly, we decide the group of reference and the group of income tax Applications in the following manner :
IT Reference Nos. 193/78, 154/78 and 113/79 - Question Nos. 1 and 2 - The income of the spouses from the professional activities of the firm cannot be clubbed together but if the spouses are also engaged in any distinct business activity such as running a chemist''s shop, their income to that extent can be clubbed together. Income from nursing home run by the doctors who themselves treat their own patients as an integral part of the profession must be treated as professional income. If the nursing home is one where patients of doctors other than the partners are admitted and treated, it may be considered a business, as discussed in the main judgment, provided the tests indicated in the course of the discussion are satisfied.
IT Application Nos. 158/81, 159/81 and 167/81- These three applications are rejected having regard to the fact that the activity carried on is absolutely professional activity and the view taken by the Tribunal is unexceptional and in accordance with the view taken by us in the course of the discussion hereinbefore.
In the result, the three references are answered in the aforesaid manner. The three Applications are rejected. There will be no order regarding costs in all the matters.