Citation Codes

Equivalent Citations

citation codes

Case Number

Case Refd. No. 28 of 1953.

Advocates

Messrs. T.V Viswanatha Aiyar and S. Narayanaswami for Applt.
Mr. C.S Rama Rao Sahib for Respt.

Judges

Rajagopalan
Rajagopala Ayyangar, JJ.

Acts

Indian Income Tax Act, Vol. 2, 4th Edn.,
S. 2(6-AA) of the Income Tax Act.
INDIAN INCOME TAX ACT

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Smart Summary

Judgment Summary (Delivered by Rajagopalan, J.)

Factual and Procedural Background

On 16 August 1946 Marimuthu Nadar and his divided sons entered into a partnership. On that date two of the sons, Bhaskara and Rajasekhara, were minors and were admitted to the benefits of the partnership.

For the assessment year 1949–1950 (previous year ended 16 August 1948) Marimuthu's own share of partnership profits amounted to Rs. 9,812. The shares of the minors, Bhaskara and Rajasekhara, amounting to Rs. 8,124 and Rs. 8,381 respectively, were included in computing Marimuthu's assessable total income under S. 16(3)(a)(ii) of the Income Tax Act. Earned income relief, however, was granted by the assessing authorities only on the basis of Marimuthu's individual share of Rs. 9,812.

For the assessment year 1950–1951 Marimuthu's own share amounted to Rs. 12,344. Bhaskara had become sui juris by then. Rajasekhara's share of Rs. 10,143 was included in computing Marimuthu's total income under S. 16(3)(a)(ii), but the earned income relief was again allowed only on Marimuthu's own share of Rs. 12,344.

The departmental authorities denied the assessee's contention that earned income relief should be calculated with reference to the minor sons' shares; the Tribunal confirmed that denial. A consolidated reference for both assessment years was made to this Court under S. 66(1) of the Act. The Court recorded that the capital contributed on behalf of the minors belonged to them and that the ownership of their share income vested in them, but the incidence of tax fell on Marimuthu under S. 16(3)(a)(ii). The Tribunal had also found that Marimuthu was in general management of the partnership business and that the minor sons did not participate in the conduct of the business.

Legal Issues Presented

Whether the assessee is entitled to earned income relief on the share income of the two minor sons for the 1949–1950 assessment year and on the share income of the one minor son for the 1950–1951 assessment year, where those shares were included in the assessee's total income under S. 16(3)(a)(ii) of the Income Tax Act. (This is the consolidated question referred under S. 66(1) and was quoted in the opinion.)
How the definition of "earned income" in S. 2(6-AA) of the Income Tax Act applies to income that is legally the income of another person but is included in the assessee's income by operation of the Act — in particular, whether the tests in S. 2(6-AA) must be satisfied by the person who is actually the owner of that income or by the assessee in whose hands the income is treated.

Arguments of the Parties

Assessee's Arguments

The assessee's counsel relied on the commentary of Kanga & Palkhivala (Income-tax, 3rd Edn., pp. 203–204) to argue that income which is earned by the assessee and included in his total income under the provisions of the Act is "earned income" even if it accrues in law to another person; thus, where a minor child's share of partnership profits is included in the assessee's total income under S. 16(3), it should be regarded as the assessee's earned income if the assessee is actively engaged in the conduct of the partnership business.

Respondent's Arguments

The respondent's counsel relied on Sampath Aiyangar's Indian Income Tax Act (Vol. 2, 4th Edn., p. 120) to argue that the phrase "any such income which though it is the income of another person" should be read to require that the income of that other person possess the characteristics previously mentioned in the definition (notably that it be derived from personal exertion). Under that view, if the legal owner (for example, a wife or a minor child) is a dormant partner, her share would not qualify as earned income even if included in the husband's income; only where the owner’s share would otherwise be "earned income" would it remain such when included in another's assessment. The opinion notes that V.S. Sundaram expressed similar views in his Law of Income Tax in India (7th Edn., p. 126).

Table of Precedents Cited

The opinion does not cite judicial precedents (reported cases); it refers to statutory provisions and to textbook/commentary authorities.

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court began by identifying that resolution of the referred question required interpretation of the definition of "earned income" in S. 2(6-AA) of the Income Tax Act. The Court reproduced the relevant portion of S. 2(6-AA), which defines "earned income" in respect of an individual as, inter alia, income chargeable under the head "Profits and Gains of business, profession or vocation" where the business is carried on by the assessee or, in the case of a firm, where the assessee is a partner actively engaged in the conduct of the business, and includes such income which, though the income of another person, is included in the assessee's income under provisions of the Act.

The Court analysed the scope of the concluding phrase "such income" (that is included in the assessee's income though it is the income of another person). It identified three tests that would follow from a plain reading of S. 2(6-AA)(b) (if that paragraph stood alone): (1) the income must be that of the assessee; (2) it must be chargeable under the head "profits and gains of business"; and (3) in the case of such income earned by a firm, the assessee should be a partner actively engaged in the conduct of the business.

The Court observed that the first of these tests — that the income must be that of the assessee — cannot be satisfied where the income is legally that of another person but is included in the assessee's income by statutory provision. However, because the statute itself includes income of another person within the scope of "earned income" by the concluding clause of S. 2(6-AA), the fact that ownership of the income vested in another person becomes irrelevant for purposes of the definition. Consequently, the remaining two tests (income chargeable under profits and gains; and the assessee being a partner actively engaged in the conduct of the business) must be satisfied.

The Court found that:

The second test was satisfied because the minors' shares were chargeable under the head "Profits and gains of business" (they were shares of partnership profits).
The third test — that the assessee be actively engaged in the conduct of the business of the firm — was also satisfied on the facts: the Tribunal had found that Marimuthu was in charge of the general management of the partnership business and that the minor sons did not participate in the conduct of the business.

The Court therefore concluded that the phrase "such income" in S. 2(6-AA) must be construed as referring to income which is treated as the income of the assessee for the purposes of assessment and that it is the activity of the assessee (not of the person who is the legal owner of the income) which is relevant in testing entitlement to earned income relief.

The Court preferred the view of Kanga & Palkhivala (that income included in an assessee's total income by statutory fiction is "earned income" if the assessee is actively engaged in the conduct of the partnership business) over the contrary view attributed to Sampath Aiyangar (which would focus on characteristics of the legal owner of the income). The Court reinforced its interpretation by reference to the deeming provisions of S. 44-D, observing that where the Act deems income to be the income of another person "for all the purposes of this Act" the statutory effect is to efface the personality of the actual recipient, making it impossible to treat the activity of that recipient as determinative of the first person's entitlement to relief.

Applying these legal propositions to the facts, the Court concluded that Marimuthu satisfied the statutory tests in S. 2(6-AA) and was therefore entitled to earned income relief measured with reference to the shares of the minor sons that had been included in his assessable income under S. 16(3)(a)(ii).

Holding and Implications

Holding: The consolidated question was answered in the affirmative in favour of the assessee. The Court held that Marimuthu was entitled to earned income relief on the shares of his minor sons which had been included in his assessable income under S. 16(3)(a)(ii), because Marimuthu was actively engaged in the conduct of the partnership business and the other statutory conditions in S. 2(6-AA) were satisfied.

Direct consequences for the parties: The assessee's claim for earned income relief on the minors' shares was upheld and the assessee was awarded the costs of the reference, including a counsel's fee of Rs. 250.

Broader implications: The opinion focused on statutory construction of S. 2(6-AA) and the effect of deeming provisions; it compared competing views expressed in standard commentaries and explained why the construction adopted by the Court gives effect to the statutory language. The judgment does not purport to discuss broader policy beyond the statutory interpretation and the direct effect on these parties.

End of summary — contents strictly reflect the material contained in the provided judgment text.

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S.A.S Marimuthu Nadar, Vridhunagar v. The Commissioner Of Income-Tax, Madras

JUDGMENT

(Delivered by Rajagopalan, J.)

The assesses, Marimuthu Nadar, and his divided sons entered into a partnership on 16th August 1946. On that date two of the divided sons, Bhaskara and Rajasekhara, were minors, and they were admitted to the benefits of the partnership.

In the assessment year 1949-1950 the previous year having ended on 16th August 1948, the share of Marimuthu in the profits of the partnership came to Rs. 9812. In computing his assessable total income, the shares of the minors, Bhaskara and Rajasekhara amounting to Rs. 8124 and Rs. 8381, were added under the provisions of S. 16(3)(a)(ii) of the Act. The assesses, however, was granted earned income relief only on the basis of his individual share Rs. 9812.

In the assessment year 1950-1951, the share of the assesses Marimuthu in the profits of the partnership amounted to Rs. 12344. Bhaskara had meanwhile become sui juris. Under the provisions of S. 16(3)(a)(ii) Rajasekhara's share Rs. 10143 was included in computing the total income of Marimuthu. But the assesses was granted earned income relief only on the basis of his own share, Rs. 12344.

The asseessee's contention, that earned income relief should be calculated also with reference to the share income of his minor sons, was negatived by the departmental authorities. That was confirmed by the Tribunal. A consolidated reference was made for both the assessment years, and the question referred to this Court under S. 66(1) of the Act ran:

“Whether the assesses is entitled to earned income relief on the share income of the two minor sons for 1949-1950 assessment year and on the share income of the one minor son for 1950-1951 assessment year included in the computation of the total income of assesses under the provisions of S. 16(3)(a)(ii) of the Income Tax Act.”

The liability of the assesses for the inclusion of the income of his minor sons in computing his total income under the provisions of S. 16(3)(a)(ii) was never in dispute, though it was found that the capital that was contributed to the partnership on behalf of the two minor-sons, Bhaskara and Rajasekhara, belonged to them. The ownership of the share income of Bhaskara and Rajasekhara vested in them, but the incidence of the tax fell on the assesses under S. 16(3)(a)(ii). The question at issue, what should be the basis for computing the earned income relief has to be answered with reference to the definition of “earned income” in S. 2(6-AA) of the Income Tax Act. The relevant portion of S. 2(6-AA) runs:

“Earned income means any income of the assesses who is an individual…………(b) which is chargeable under the head ‘Profits and Gains of business, profession or vocation’ where the business, profession or vocation is carried on by the assesses or, in the case of a firm, where the assesses is a partner actively engaged in the conduct of the business, profession or vocation;………and includes any such income which, though it is the income of another person, is included in the assessee's income under the provisions of this Act. ……..”

The question referred to us has really to be answered with reference to the scope of “such income”, which, though it is the income of another person, is included in the assessee's income under the provisions of this Act.

We are concerned in this case only with the income chargeable under the head “Profits and gains of business.” It was under that head that the shares of each of the partners and each of the minors admitted to the benefits of the partnership fell during the assessment years in question. It was found by the Tribunal that in the relevant years it was the assesses Marimuthu that was in charge of the general management of the partnership business. It was also never in dispute that in the relevant years the minor sons of the assesses did not participate in the conduct of the business of the partnership.

The expression “such income” in the concluding clause of S. 2(6-AA), with reference to income chargeable under the head “Profits and gains of business”, must obviously refer to the income specified in Cl. (b) of S. 2(6-AA). That one of the tests prescribed by S. 2(6-AA) was that the income must be chargeable under the head “profits and gains of business” was never in dispute. That the business in question was that of the firm, of which the assesses was a partner, and of which he was in general management, was not in dispute either. In the case of a firm, the test prescribed by S. 2(6-AA)(b) is that the assesses should be a partner actively engaged in the conduct of the business. That test the assesses obviously satisfied, because the assesses Marimuthu was a partner of the firm and he was actively engaged in the conduct of the business of the firm.

Had S. 2(6-AA)(b) stood by itself, without the concluding portion of S. 2(6-AA), the tests to be satisfied would have been (1) the income must be that of the assesses, (2) that the income should be chargeable to tax under the head profits and gains of business, and (3) in the case of those profits and gains of business having been earned by a firm, the assesses should be a partner actively engaged in the conduct of the business.

Obviously the first these tests cannot be satisfied, where the income of another person is included in the income of the assesses for purposes of computation of the assessee's total income or of its assessment to tax. Therefore in construing the scope of the expression “such income” in the concluding portion of S. 2(6-AA) the fact that the ownership of income vested in a person other than the assesses becomes irrelevant. The statute itself makes it so. But the other two tests will have to be satisfied before it can be treated as “such income” within the meaning of the last clause of S. 2(6-AA).

The second of the tests was satisfied in this case even with reference to the share of the firm's profits which accrued to Bhaskara and Rajasekhara. We have already pointed out that that was income which was chargeable to tax under the head profits and gains of business.

What is the scope of the third of the tests we have mentioned above is therefore the question to be answered. In our opinion the answer should be, that on a plain reading of the statutory provisions of S. 2(6-AA) it is the assesses that should have been actively engaged in the conduct of the business of the firm, of which he as well as the miners, Bhaskara, and Rajasekhara, were partners, whatever be the basis of the computation of the assessable income of the assesses Marimuthu. Marimuthu satisfied that test.

In the absence of any reported case, where the question at issue before us was decided, the learned Counsel referred to the views of commentators on the Indian Income Tax Act as part of their respective arguments.

The learned Counsel for the assesses referred to the views of the authors, Kanga and Palkhivala, in their book on Income-tax, 3rd Edn., at pages 203-4:

“Under the last para of this definition, income which is earned by the assesses and included in his total income under the provisions of this Act is his earned income though it may accrue in law to another person. Thus where an assessee's wife is a partner, or his minor child is admitted to the benefits of the partnership, in a firm of which the assesses is a partner, the wife's or child's share of profits is included in the assessee‘s total income under S. 16(3) and it would be regarded as the assessee's earned income if he is actively engaged in the conduct of the partnership business.”

The learned Counsel for the respondent pointed out that in Sampath Aiyangar's Indian Income Tax Act, Vol. 2, 4th Edn., page 120, the learned author observed:

“…… On the language of Cl. (c) under discussion which runs, ‘and includes any such income which though it is the income of another person’, it would appear that the income of such other person should possess characteristics previously mentioned, one of which is that the income should be derived from personal exertion. From this it would follow that if the wife were merely a dormant partner, her share of the partnership profits would not be earned income, though it might be included in the total income of the husband. To the argument, for proving the contrary, that if the wife were an active partner, her income would be earned income without any more mention, the answer is afforded, that since the wife is not an assesses quoad that income, a specific provision was rendered necessary that if her share of the profit were otherwise earned income, it should not cease to be such merely because she was not assessed, but her husband was. If the husband were also an active partner, both the shares would be earned income. If the husband were a dormant partner, but the wife were an active partner, the wife's income would be assessed in the husband's hands, but as earned income.”

To similar effect were the views of Mr. V.S Sundaram expressed in his Law of Income Tax in India, 7th Edn. at page 126.

In our opinion, of the two views set out above, that taken by the learned authors, Kanga and Palkhivala, would appear to be correct. Earned income relief can be claimed only by the assesses, whose income, his own as well as that which is deemed to be his by any legal fiction, is assessed to tax. Ss. 16(1)(c), 16(3), 23-A and 44-D are instances of such legal fictions. They would all be cases of income of another person included in the assessee's income within the meaning of the last clause of S. 2(6-AA) of the Act. Since it is only the assesses that can claim earned income relief, “such income”, as that expression has been used in S. 2(6-AA), must be the income only of the assessed though it has to be viewed as his income only by recourse to one or the other of the legal fictions enacted by the Act. The expression “such income” has, in our opinion, to be construed as income on which the assesses has to be assessed to tax. That may, as in the case of the assesses before us, Marimuthu, include the income of any other person. But since it is not the other person who can be granted relief of earned income, S. 2(6-AA) does not, in our opinion, require that the other person, whose income is included in the income of the assesses, should either by himself or in conjunction with the assesses satisfy each of the three tests we have listed above as those imposed by S. 2(6-AA). In the construction of the statutory language of S. 2(6-AA), equitable considerations can play no part. If the wife or minor child, whose income is treated as the assessee's and taxed as such, does not participate in the conduct or management of the business of the firm, nonetheless, if the assesses participated in the management or conduct of the business of the firm, the assesses would be entitled to earned income relief. Per contra, if the assesses himself did not participate in the conduct or management of the business of the firm, the fact, that the wife or the minor son participated in such management and conduct, could not be a relevant factor, even on equitable considerations, in deciding whether the assesses is entitled to earned income relief on the share, which in law accrued to and vested in the wife or the minor children.

These considerations, apart, it appears to us that the language of S. 44-D (which is one of the classes of cases where the income of one person is deemed to be the income of another) precludes the construction that the activity posited in the case of income falling within the “inclusive” portion of the definition in S. 2(6-AA) is that of some person other than the assesses. Sub-Ss. 1 and 2 of S. 44-D which are relevant in the present context run:

“44-D. (1). Where any person has, by means of a transfer of assets, by virtue or in consequence whereof, either alone or in conjunction with associated operations, any income which if it were the income of such person would be chargeable to Income Tax becomes payable to a person not resident or to a person resident but not ordinarily resident in the taxable territories, acquired any rights by virtue or in consequence of which he has within the meaning of this section power to enjoy such income, whether forthwith or in the future, that income shall, whether it would or would not have been chargeable to Income Tax apart from the provisions of this section, be deemed to be income of such first-mentioned person for all the purposes of this Act.

(2) Where any person receives or is entitled to receive, whether before or after any transfer of assets by virtue or in consequence whereof either alone or in conjunction with associated operations any income becomes payable to a person not resident or resident but not ordinarily resident in the taxable territories, any sum paid or payable by way of a loan or repayment of a loan or any other sum, being a sum which is not paid or payable for full consideration in money or money's worth, paid or payable otherwise than as income, such income shall, whether it would or would not have been chargeable to Income Tax apart from the provisions of this section be deemed to be the income of the first-mentioned person for all the purposes of this Act.”

The “deeming” is for all the purposes of the Act which in effect effaces the personality of the person actually in receipt of the income. In such a situation, it would be impossible to hold that the activity of “the second mentioned person” was considered as the criterion for the judging of the eligibility of the “first-mentioned “person” to earned income relief.

In our opinion, all that Marimuthu had to satisfy with reference to the third of the tests we have mentioned above was that he was actively engaged in the conduct of the business of the firm of which he was a partner. That test he satisfied. His claim that earned income relief should be granted not only on the basis of his share of the firm's profits but also on the shares of his minor sons, which were included in his assessable income under the provisions of S. 16(3)(a)(ii) of the Act was well founded.

Our answer to the consolidated question referred to us is in the affirmative and in favour of the assesses. The assesses will be entitled to the costs of this reference. Counsel's fee Rs. 250.

V.C.S

S.A.S Marimuthu Nadar, Vridhunagar v. The Commissioner Of Income-Tax, Madras

Judgment Summary (Delivered by Rajagopalan, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Respondent's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

S.A.S Marimuthu Nadar, Vridhunagar v. The Commissioner Of Income-Tax, Madras

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