Income Tax Reference No. 436 of 1981

6th December, 1993

Petitioner Counsel: Dr. V. Balasubramaniam, J. P. Devadhar
Respondent Counsel: S. J. Mehta, I. M. Munim

JUDGMENT

MRS. SUJATA MANOHAR, J. :- This reference pertains to Assessment Year 1975-76. The Assessees Shri and Smt. Vasudeo V. Dempo are husband and wife, married under the custom of Goa and are governed by the Portuguese Civil Code. The Income-tax Officer completed his assessment of the income of the assessees as a Body of Individuals in respect of their income from other sources such as dividends, interest, etc. and capital gains. They had no income from house property. The Assessees carried the matter in appeal to the Commissioner of Income-tax (Appeals) challenging their assessment in the status of Body of Individuals. The Commissioner of Income-tax (Appeals) held that their assessment in the status of Body of Individuals was wrong in law. He, accordingly, cancelled the said assessment and directed the Income-tax Officer to assess both the members of the communion individually. Revenue's appeal before the Tribunal was dismissed. The Tribunal observed that the case was covered by the decision of the Bombay High Court in the case of P. G. Bhende, reported in 106 ITR p. 932. From the decision of the Tribunal, the following question has been referred to us for determination :

"Whether on the facts and circumstances of the case, incomes under the heads "income from other sources" and "income from capital gains" were not assessable in the hands of Body of Individuals, but were assessable separately in the hands of the individual spouses ?"

2. It is an accepted position that both the spouses are married under the Goa customary law and are governed by the Portuguese Civil Code. The position relating to the rights of spouses under the Portuguese Civil Code was considered at length by a Division Bench of this Court in the case of Commissioner of income-tax, Mysore vs. Purushotam Gangadhar Bhende, reported in (1977) 106 ITR p. 932. The Court has summarised the relevant provisions of the Portuguese Civil Code as follows : (i) During the subsistence of a marriage celebrated as per the custom of Goa, the ownership and possession of "the common estate", immovable as well as movable, vests in both the husband as well as the wife; (ii) Proposition No. 1 applies to the corpus as well as the income of all communion property, immovable as well as movable; (iii) The husband has only a right of management, but even that right is not an absolute right so as to amount to the "ownership" of the income; and (iv) In the corpus as well as the income of communion property, immovable as well as movable, the husband and the wife each have, during the subsistence of a marriage celebrated as per the custom of Goa, a fixed and certain half share which can be ascertained on the termination of the communion by divorce, separation or death. What is important in this connection is that it is an admitted position that on the death of one of the spouses, communion property does not devolve by survivorship, but the half share of the deceased spouse goes by succession to his or her own heirs or legatees. Therefore, by virtue of the Portuguese Civil Code both the spouses in the present case have a fixed half share in the income from other sources, namely, income from dividends, interest as well as income arising from capital gains. If this is so, and each of them has a fixed and determined share in such income then the Tribunal was right in holding that the ascertained share of each of the spouses in the said income will have to be assessed in the hands of each spouse as an individual.

3. In this connection a reference may be made to the judgment in Assessees' own case in Income-tax Reference No. 347 of 1975 with Income-tax Reference No. 347A of 1975 being judgment dated 31st October 1985 delivered by Kania, Acting Chief Justice (as he then was) and Bharucha, J. The Division Bench held that income possessed by the communion of interest of husband and wife under the Portuguese Civil Code was liable for assessment in equal shares in the hands of each of the consorts separately and not in the hands of the "Body of Individuals".

4. For the relevant assessment year, we may also refer in this connection to a decision of this High Court in the case of Commissioner ofGift-tax, Bangalore vs. Aleixo P. Valbo and Anr., reported in 143 ITR P. 372. In that case, which was decided under the Gift Tax Act, the assessee had made a gift of immovable properties and movable properties. The question was whether in the gift-tax assessment proceedings the entire gift was to be assessed in the hands of the body of individuals or whether it had to be separately assessed in equal shares in the hands of the two spouses constituting the body of individuals. The Court, after considering the provisions of the Portuguese Civil Code as well as the decision of this High Court in the case of Purushotam Gangadhar Bhende (supra), held that when the husband and wife made the gifts, each of them gifted only his and her respective half shares in the properties and hence no assessment could be made on the footing of their having made the gifts as a body of individuals. The gifts will have to be assessed separately and in equal shares in the hands of each of the two spouses. Similarly, in the case of Additional Commissioner of Income-tax, Mysore vs. Mr. and Mrs. Valentino F. Pinto, Mapuca, reported in (1984) 150 ITR p. 408, another Division Bench of this Court held, in view of the judgment of this Court in the case of Purushotam Gangadhar Bhende(supra), that the respective half shares of the husband and wife in the income from business run by the communion of the husband and wife, married according to the custom of Goa, should be assessed separately in equal shares in the hands of each of them and not in the hands of the body of individuals of the communion. In the present case, we are not concerned with any income from business run by the communion and hence the judgment is not directly relevant. The Division Bench, however, has observed that the ratio of Pumshotam Gangadhar Bhende's case was not confined only to income from house property, but was applicable to all types of income.

5. Our attention is drawn to a judgment of Dr. B. P. Saraf and U. T Shah, JJ. dated 22nd and 23rd April 1993 in Income-tax Reference No. 124 of 1980 in the case of C.I.T., Karnataka-II vs. Modu Timblo in which the Division Bench has considered different types of income arising to a communion of husband and wife under the Portuguese Civil Code. As stated earlier, in the present case, we are only concerned with income from other sources and capital gains. We are not concerned with income arising from the business of the communion. In respect of income arising from other sources such as interest and dividends, the Division Bench has held that such income from other sources arises from investment of funds which belonged in equal shares to both the husband and wife. There is no question of any management or effort in deriving this income. Hence, there is nothing to indicate that the income from these two sources was derived by the two co-owners as a body of individuals. This income must therefore be assessed with equal shares separately in the hands of both the husband and wife in the status of individuals. The same ratio, in our view, would also apply to capital gains which merely arise from the sale of such investments which are held both by husband and wife in equal shares.

6. In the present case, when two persons got married as a result of which a communion of interest in various types of property or income arises under the Portuguese Civil Code, they cannot be considered as having come together with the object of producing an income. Therefore, they cannot be considered as a body of individuals. In the case of Commissioner of Wealth-tax vs. Vasudeo V. Dempo, reported in (1992) 196 ITR p. 216, the Supreme Court considered the case of the very assessees on the question of wealth tax. The Supreme Court has cited with approval the discussion of the High Court on the question of construction of the expression "association of persons". It said that even though joint rights in the properties of the spouses came into being as a result of marriage under the provisions of the Portuguese Civil Code, it did not follow that husband and wife got married with the purpose or object or motive of constituting themselves as joint holders of the property. The communion of the property was a necessary incidence of marriage, but it cannot be regarded as the object or purpose of marriage. Hence, no association of persons could have come into being as a result of the marriage of the two assessees in the absence of any ante-nuptial agreement to that effect. The Court, therefore, held that wealth-tax exemption under section 5 of the Wealth-tax Act is admissible to each one of the spouses as individuals.

7. We make it clear that in the present reference, we are not concerned with business income arising to the communion and hence we are not concerned with the judgment of the Division Bench of Dr. Saraf and U. T. Shah, JJ. dated 22nd/23rd April 1993 in Income-tax Reference No. 124 of 1980 in so far it deals with business income.

8. In the premises, the question which is referred to us is answered in the affirmative and in favour of the Assessces.

No order as to costs.

Reference answered in favour of the assessees.