Shankaranarayana Construction Co. and Others vs State of Karnataka and Another

Tirath S. Thakur, J.—These appeals arise out of two different orders passed by a single Bench of this court whereby W. P. No. 11258 of 1998 (see Shankaranarayana Construction Co. and Others Vs. State of Karnataka and Others, and W. Ps. Nos. 10415-17 of 1999 have been dismissed.

The appellant--Shankaranarayana Construction Company is a partnership concern. It owns a coffee estate in Chickmagalur and carries on business of growing and selling of plantation crops such as coffee and pepper. In terms of a show cause notice dated February 26, 1998, the Joint Commissioner of Income Tax (AIT and CV), Bangalore, called upon the appellant-firm to show cause why assessment order dated April 19, 1996, for the assessment year 1995-96 be not set aside and the Deputy Commissioner of Agricultural Income Tax, Chickmagalur, directed to re-do the assessment on the lines set out in the show cause notice. The notice set out the relevant facts which were to the extent relevant for the present as under :

"For the years 1990-91 to 1993-94 assessment was concluded and the income of the firm was determined as loss. Shares of each of the partners was also determined separately which was also a loss and ordered to be carried forward for set off in subsequent years.

With the omission of Sections 19A and 19C of the KAIT Act, 1957, from April 1, 1994, the income of the firm is taxable u/s 19 and the share of the loss of the firm can only be set off against the income of the firm u/s 15 of the KAIT Act, 1957. Share of loss of the partners in the firm becomes the loss in the hands of the partner liable to be carried forward as if the loss is incurred by the partner himself.

In view of the above scheme of the Act, assessment order dated April 19, 1996, of the assessing authority ordering set off of loss of the partners of the previous years in the income of the firm and further ordering, that the remaining loss to be carried forward to subsequent years for set off in the income of the firm is erroneous, improper and prejudicial to the interest of the Government Revenue.

In view of the above, the assessment order dated April 19, 1996, for the assessment year 1995-96 passed by the then assessing authority is proposed to set aside and direct the DCAIT, Chickmagalur, the present authority to re-do the assessment on the lines of the above observations."

Aggrieved by the said notice, the appellants filed W. P. No. 11258 of 1998 (see Shankaranarayana Construction Co. and Others Vs. State of Karnataka and Others, in this court in which they assailed the constitutional validity of the KAIT Act, 1957, as amended by the Karnataka Taxation Laws (Amendment) Act, 1994, and a declaration that the petitioner-firm was entitled to set off the unabsorbed loss allocated to its partners during the preceding years for purposes of computing the assessable income of the firm for the assessment year 1995-96 onwards. A prayer for quashing the show cause notice was also made.

By an order dated July 29, 1998, Singhal J., dismissed the said petition holding that the new scheme of assessment of tax in terms of Section 19 of the Act did not suffer from any constitutional infirmity and that since the Act as amended did not envisage transfer of the unabsorbed losses allocated to the partners for being set off against the income of the firm for future years, there was no question of introducing any such provision by a process of interpretation. The benefit of carrying forward the losses in the hands of the partners to set off the same against the income of the firm could not, observed the learned judge, be allowed in the absence of a specific statutory provision to that effect. Writ Appeal No. 4153 of 1998 assails the correctness of the said order.

In so far as W. As. Nos. 5860-62 of 1999 are concerned, the same arise out of the dismissal of W. Ps. Nos. 1041547 of 1999 by an order dated July 1, 1999, passed by the very same Bench following the order passed in the earlier writ petition. In the said petitions, apart from challenging the constitutional validity of the amended provisions of the Karnataka Taxation Laws (Amendment) Act, 1994, the petitioners had sought a declaration that the firm is entitled to set off the unabsorbed losses allocated to its partners during the preceding years for purposes of computing its assessable income. The writ petitions also assail the validity of the orders passed by the assessing authority in so far as the same denied to the petitioners the benefit of set off against the accumulated unabsorbed losses to the extent of Rs. 1,18,56,221.

Appearing for the appellants Mr. Naganand, learned senior counsel, argued that the Karnataka Taxation Laws (Amendment) Act, 1994, had omitted Sections 19A, 19B, 19C and subjected registered firms to a uniform tax rate of 40 per cent, on their total agricultural income. While doing so, the Legislature had according to learned counsel omitted to make a provision under which unabsorbed losses allocated to the partners of such firms in the previous years could be allowed to be set off against the future income of the firms. He contended that since the State enactment was aimed at introducing a scheme similar to the one that was introduced by Parliament in so far as the payment of Income Tax by registered firms was concerned, the absence of a provision like Section 75 of the Income Tax Act permitting set off against unabsorbed losses was nothing but an unintended omission, which this court could remedy in order to remove the inequitable consequences flowing from the same. Relying upon the decision of the Supreme Court in Commissioner of Income Tax, Bangalore Vs. J.H. Gotla, Yadagiri, , learned counsel argued that the speech made by the Finance Minister in the State Legislature bore testimony to the fact that the State Legislature intended to adopt the scheme prevalent under the Central Income Tax Act by prescribing a higher rate of tax for the registered firms and leaving the share of the partners free from any levy. Since the Central enactment did not have any transitory provision permitting transfer of unabsorbed losses in the hands of the partners to the firm to enable it to set off against its future profits, Parliament had to introduce Section 75 which made a specific provision to that effect. The argument, therefore, was that what was considered to be just and fair by Parliament in terms of providing for set off of unabsorbed losses could be similarly treated to be fair and equitable for the levy of the tax under the State enactment especially when the intention of the State Legislature as evidenced by the Budget Speech of the Finance Minister clearly was to introduce in the State a scheme similar to the one that was prevalent under the Central law.

Mr. B. Anand, learned counsel for the respondents, on the other hand, argued that the State law did not provide for unabsorbed losses in the hands of the partners to be set off against profits of the firm and that just because Parliament had provided for such a set off under the Income Tax Act was no reason for the court to rewrite the provision or read something into the same which did not otherwise exist. Gotla''s case relied upon by the appellants was according to learned counsel inapplicable to the cases at hand especially when the principles governing interpretation of statutes was well settled by a string of decisions of the Supreme Court.

Section 19A of the Karnataka Agricultural Income Tax Act, 1957, that held the field till March 31, 1994, envisaged determination of agricultural Income Tax payable by registered firms and allocation of the share of each partner in such income to be included in his total income for assessment to tax separately. Sub-section (2) to Section 19A stipulated that if such share of the partner is a loss, it shall be set off against other income and carried forward and set off in accordance with the provisions of Section 15. The provisions of Section 19A were however deleted together with those of Sections 19B and 19C dealing with the assessment of unregistered firms and method of computing partner''s share in the income of the firm by the Karnataka Taxation Laws (Amendment) Act, 1994. Consequently, registered partnership firms became liable to tax in terms of Section 19 of the Act read with Part II of the Schedule as amended at 40 per cent, of the total agricultural income earned by them. The amendments incorporated by the Karnataka Act No. 18 of 1994 left free the share of profit allocated to each partner in his hands from any further liability. The amended provisions did not envisage allocation of loss to a partner or its being set off against his other income. Suffice it to say that the scheme underlying the earlier provisions stood abrogated and substituted by a new scheme which could but significantly did not provide for allocation of shares or carrying forward or setting off of losses by the partners against their income. The appellants all the same argue that the loss allocated to the partners is in essence, the loss of the firm itself, and that where the partner has ceased to be assessable on his share of income, the loss allocated to him will become incapable of being set off against other income of the partner and should therefore revert to the firm thereby entitling the firm to set off such unabsorbed losses against its future income. Such reversion of the unabsorbed losses to the firm would according to the appellants remove the inequitable consequences that flow from the introduction of the new taxing scheme which a writ court can and ought to avoid by suitably interpreting the amended provisions. We, however, regret our inability to subscribe to that line of reasoning. The amendments introduced by the Karnataka Taxation Laws (Amendment) Act, 1994, has no doubt changed the very scheme of taxation, but, while doing so, no provision regarding reversion of unabsorbed losses allocated to the partners has been made although the Legislature could have made such a provision. In the absence of any provision under which unabsorbed losses allocated to the partners could revert back to the firm so as to entitle it to claim set off against future profits, it is difficult to see how such a provision can be implied or read into the same.

That apart, we do not see any omissions in the statutory changes brought about pursuant to the Budget Speech. The Finance Minister had no doubt expressed the State''s intention to tax the income of registered firms at a flat rate of 40 per cent. while exempting its partners from any liability as was done under the Central Income Tax Act, but the declaration of any such intention was only a broad indication of the policy or proposal that the Government had in mind, which proposal was carried into effect by amending the relevant provisions of the Act. To that extent there is no discrepancy between what the Finance Minister had declared on the floor of the House and the consequential steps that were taken in that direction. The Budget Speech however did not envisage nor did it otherwise refer to the supposed intention of the Government to provide for set off against unabsorbed losses in the hands of the partners. The argument that since the State law had to be brought in conformity with the Central Income Tax Act, therefore the intention must be taken to be to bring the two laws in conformity with each other in every possible detail has not commended itself to us. The budget proposals contained in the speech of the Finance Minister cannot be said to be legally enforceable promises sufficient to support an action in a court of law. The proposals in the speech are only in the nature of proposals and may or may not culminate in amendment to statutory provisions. Even where amendments are proposed, the broad proposal initially made may undergo a change and may be passed only in a modified form. In the circumstances, the absence of a provision by which unabsorbed losses in the hands of the partners would revert to the firm for being set off against its future income cannot be said to be an unintended omission as was sought to be argued on behalf of the appellants.

One of the corollaries to the general rule of literal construction is that nothing is to be added or taken from a statute unless there are adequate grounds to justify the inference that the Legislature intended something which it omitted to express. It is also one of the settled principles of construction that although a court cannot supply a real casus omissus it should not so interpret a statute as to create a casus omissus when there is really none. (See State of Karnataka Vs. Union of India (UOI) and Another, and Commissioner of Income Tax, Central, Calcutta Vs. National Taj Traders, ).

In Shrimati Tarulata Shyam and Others Vs. Commissioner of Income Tax, West Bengal, , the court held that even if there be a casus omissus, the defect can be remedied only by legislation and not by judicial interpretation. The court observed (page 357) ;

"To us, there appears no justification to depart from the normal rule of construction according to which the intention of the Legislature is primarily to be gathered from the words used in the statute. It will be well to recall the words of Rowlatt J. in Cape Brandy Syndicate v. IRC [1921] 1 KB 64 at page 71, that :

''. . . in a Taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.''

Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however, great the hardship may appear to be judicial mind to be."

Reliance by the appellants upon the decision in Gotla''s case is in our opinion misplaced. In Gotla''s case, the Supreme Court was examining whether the loss suffered by the wife and minor child of an assessee could be set off against the income of the assessee. Answering the question in the affirmative, their Lordships held that under the scheme of the Income Tax Act where the wife or the minor child carries on a running business, the right to carry forward the loss in such business would be available to the wife or the 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 such losses u/s 24(2). That could not according to their Lordships be the intention of Parliament. The court held that in cases where Section 16(3) of the Act operates, the profit or loss from the business of a wife or minor child included in the total income of the assessee should be treated as profit or loss from the business carried on by him/her for the purpose of carrying forward and set off u/s 24(2) of the Act. It was in the above background that their Lordships indicated the correct approach to be adopted by the court in cases where the legislative intent was not evident from the provisions or where inequitable results were bound to follow in case the provision was not given an imaginative interpretation. The following observations made by their Lordships are in this regard apposite (page 339) :

"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. 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 a fortress out of the 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."

In the case at hand, the scheme introduced by the amendment brought in the year 1994 does not provide for reversion of the unabsorbed losses to the partnership concern. There is a clear omission of any such provision in the amended Act. The legal position relevant to such cases is fairly well settled by the decisions of the Supreme Court that a matter which should have been but has not been provided for in a statute cannot be supplied by the courts for doing so will be legislation and not construction. Reference may in this connection may also be made to the decision of the Supreme Court in S.P. Gupta Vs. President of India and Others, where the apex court among others recognised the following three principles regarding interpretation of statutes (pages 313, 314) :

"1. Where the language of a statute is clear and unambiguous, there is no room for the application either of the doctrine of casus omissus or of pressing into service external aid, for in such a case the words used by the Constitution or the statute speak for themselves and it is not the function of the court to add words or expressions merely to suit what the courts think is the supposed intention of the Legislature.

Except in the aforesaid cases, a mere speech of any member made on the floor of the House during the course of a parliamentary or legislative debate would not be admissible at all because the views expressed by the speaker may be his individual views which may or may not be accepted by the majority of the members present in the House.

Where the scheme of a statute clearly shows that certain words or phrases were deliberately omitted by the Legislature for a particular purpose or motive, it is not open-to the court to add those words either by conforming to the supposed intention of the Legislature or because the insertion or the omission suits the ideology of the judges deciding the case. Such a course of action would amount not to interpretation but to interpolation of the statutory or constitutional provisions, as the case may be, and is against all the well established cannons of interpretation of statutes." (emphasis supplied)

In Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, , the court held that the principle of liberal interpretation cannot be carried to the extent of doing violence to the plain and simple language used in the enactment. It would not be reasonable or permissible for the court to rewrite the Section or substitute words of its own for the actual words employed by the Legislature.

The new scheme of taxation applicable to registered firms is clear and unambiguous. It provides for a flat rate of 40 per cent, towards tax without any provision for reversion of unabsorbed losses allocated to the partners for the previous assessment years. The absence of any such provision does not however make the scheme unworkable or anomalous. Even the appellants do not find the new scheme of taxation to be unworkable in its present form. All that was argued was that the absence of a provision for reversion of the unabsorbed losses to the firm in setting of the same against future income makes the scheme inequitable and onerous. We do not think that the remedy for any such flaw or deficiency lies in judicial heroics. The appeal against any inequitable and oppressive consequences should be to the Legislature, who can in its wisdom provide such relief as may be considered just and proper by it.

These writ appeals accordingly fail and are dismissed but in the circumstances without any orders as to costs.