The Commissioner of Income-Tax, Madras
V. S. A. S. Marimuthu Nadar [1961] INSC 243 (10 August 1961)
HIDAYATULLAH, M.
GAJENDRAGADKAR, P.B.
SUBBARAO, K.
CITATION: 1962 AIR 156 1962 SCR (3) 102
CITATOR INFO :
F 1985 SC1698 (39)
ACT:
Income Tax-Earned income relief-If can be
granted on minor son's share of profits included in father's income-Incometax
Act, 1922 (11 of 1922), ss. 2(6AA), 16(3) (a)(ii).
HEADNOTE:
The respondent formed a partnership firm with
his two major sons, and his two minor sons were admitted to the benefits of the
partnership to the extent of their shares. In the relevant assessment years the
income of the minors was added to the total income of the respondent under s.
16(3)(a) (ii) of the Income-tax Act and he was granted "earned income
relief" only to the extent of his own individual share of the profits. He
claimed earned income relief under s.
2(6AA) of the Income-tax Act on the share of
the profits of the minor sons which was included in his total income.
Held, that the general intention of s. 2
(6AA) of the Income-tax Act is to give relief in cases where the income of a
minor is included in the total income of the father who has to pay income tax
on the consolidated amount of profits and the section means that in the case of
a firm the father being the partner who is actively engaged in the conduct of
the business of the firm while the minor is not, earned income relief should be
given to the father to the extent of the minors' share of the profits also.
CIVIL APPELLATE JURISDICTION Civil Appeals
Nos. 427 and 428 of 1960.
Appeals from the judgment and order dated
August 28, 1956, of the Madras High Court in case Referred No. 28 of 1953.
H. N. Sanyal Additional Solicitor General of India, K. N. Rajagopal , Sastri, P. M. Sen and P. D. Menon, for the appellants.
Narayanaswami and R. Gopalakrishnan, for the
respondents.
103 1961 August 10. The Judgment of the Court
was delivered by HIDAYATULLAH, J.-These are two appeals against the judgment of
the Madras High Court dated August 28, 1956. by which a composite question
embracing two assessment years, referred by the Income-tax Appellate Tribunal
(Madras Bench, 'B' ) was answered against the Department. The question, which
was referred to the High Court, was as follows "Whether the assessee, is
entitled to earned income relief on the share income of the two minor, sons for
1949-50 assessment year and on the share income of one minor son for 1950-51
assessment year included in the computation of the total income of assessee
under the provisions of section 16(3)(a)(ii) of the Income-tax Act The
respondent, S.A.S. Marimuthu Nadar, was the manager of a Hindu undivided
family. The family consisted of Marimuthu Nagar, his two major sons and two
minor sons. On August 16, 1946, the family divided, and a firm came into
existence.
Marimuthu Nadar and his two major sons took
4/16th share each and the two minor sons were admitted to the benefits of
partnership to the extent of 2/16th share each. For the assessment year,
1949-50 (the previous year ended on August 16, 1948 ) the share of profits of
Marimuthu Nadar from the partnership was Rs. 9,812, while the share of profits
of his two minor sons was Rs. 8,124 and Rs. 8,381. The income of the minors was
added to the total income of Marimuthu Nadar under s.16(3)(a)(ii) of the
Income-tax Act. Marimuthu Nadar was granted earned income relief only to the
extent of his own individual share of the profits from the partnership.
In the assessment year, 1950-51, the elder of
the two minor sons had become major, and it was only the share of the 104
remaining minor son which was included in the total income of Marimuthu Nadar.
In that year also, he was given earned income relief only on his share of
the-profits but not on the share of the profits of the minor son, which wag
included in his total income. Marimuthu Nadar's share of profits was Rs. 12,344
and that of his minor son, Rs. 10,143.
Marimuthu Nadar appealed to the Appellate
Assistant Commissioner and also to the appellate Tribunal; but his appeals were
unsuccessful. At the instance of Marimuthu Nadar, the Tribunal referred the
above question to the High Court for its decision. The High Court answered the
question in the affirmative and in favour of the assessee.
The Commissioner of Income-tax, Madras, has
therefore, appealed with a certificate under s.66(a)(2) of the Indian
Income-tax Act.
There is no dispute about the amounts
involved, nor about the inclusion of the share of the profits of the minors
from the partnership, in the total income of the father. The contention,
however, is that earned income relief can only be granted to the father in
respect of his own individual share of profits and not in respect of the share
of the minor or minors, as held by the High Court. The Income-tax Officer, the
Appellate Assistant Commissioner and Tribunal held that in view of the
definition of "earned income" in s.
2(6AA), only that portion of income was
entitled to this relief which satisfied the condition that it was earned by the
person to whom it belonged before its inclusion in the total income of another,
and that in the case of an unregistered firm, the minor or the wife, as the
case may be, must, as a partner, have been actively engaged in the conduct of
the business before earned income relief would be admissible. The High Court
held that inasmuch as the profits were earned by Marimuthu Nadar working as a
partner actively engaged in the conduct of the business and the share of the
minors was included 105 in his total income, the definition justified the
inclusion of the minors' share in the amount, on which earned income relief
could be claimed.
Section 2(6AA), omitting portions not relevant,
reads as follows:
"earned income" means any income of
an assesee who is an individual,...unregistered firm...
x x x x x x (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 assessee or., in the case
of a firm, where the assessee is a partner actively engaged in the conduct of
the business., profession or vocation ;
x x x x x x 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, but does not include any such income
which is exempt from tax under subsection (2) of section 14 or under a
notification issued under section 60." The general intention behind the
section, in spite of its obscurity, is fairly clear. It is to give to an assessee,
earned income relief in respect of the income of another person, included in
his total income under the provisions of this Act. The only difficulty is about
the conditions under which such relief is to be granted. The words of the last
paragraph of the section are "and includes any such income", and the
question is what income is indicated by the word "such". Three
readings of the section were considered at the hearing ; but one. of them must
be rejected as clearly not admissible. That reading is to take "such"
back to the words "any income of an assessee" in the opening part of
the definition. It is not necessary to give detailed. reasons why this reading
is not permissible. It is 106 enough to say that if the latter part of the section
is read in this extended form, it makes no sense.
The other two readings were pressed upon us
for our acceptance respectively by the rival parties. It is admitted by both
sides that the quality of the income which is entitled to earned income relief
by virtue of the latter part of s.2(6AA) must be that of learned income"
as defined in the first part of the sub-section. The question is who must earn
that income., or, in 'other words, in an unregistered firm, is it a condition
precedent that the minor or the wife must be actively engaged in the conduct of
the business., or is it sufficient if the father or the husband is so engaged ?
The words "such income" refer, as we have said, not to the words
"'any income of an assessee" in the earlier part but to the whole
definition of "earned income" given by the Act, before it says what
is to be included in it. In other words, by "such income" is meant,
earned income determined in the same manner in which that. income is to be
determined under the earlier part of the definition. The definition requires
that "earned income" should be (a) income of an assessee who is,
inter alia, an individual or an unregistered firm ; (b) if chargeable under the
head "Profits and gains of business...", the business must be carried
on by the assessee, if an individual, or in the case of a firm, where the
assessee is a partner actively engaged in the conduct of the business. The
emphasis is upon the assessee carrying on the business himself or as an active
partner in the conduct of the business.
The two conditions were obviously satisfied
by Marimuthu Nadar in respect of his own share of the profits from the
partnership. The question is whether they are satisfied in respect of the share
of the profits of the minors in the two assessment' years. According to the
Department, "such income" must be earned income., and earned by the
person who receives it in the first instance and not by the 107 person in whose
total income it is included by the Act. In other words to get the benefit, the
income must be earned actively by the minor or the wife, before it can qualify
for the earned income relief in the hands of the father or the husband, as the
case may be. The case of the other side is that so long as the father or the
husband has worked actively as a partner, the income would be entitled to the
relief, even though it was initially the income of the minor son or the wife.
In the case of a minor, the position is clear, because a minor cannot be a
partner actively engaged in the conduct, of the business, and it is impossible
that the section is meant to apply to a minor only when a minor is engaged
actively in business as a partner. In the case of a wife, however, the matter
is not so simple, because the wife may be actively engaged in the conduct of
the business with her husband or the, husband may be dormant. If the wife is
actively engaged and the husband is not, on the reading suggested by the
assesee, earned income relief would not be admissible to the husband, but on
the reading suggested by the Department, it would be. If the husband is
actively engaged in the business but the wife is not, then according to the
reading suggested by the assessee, the husband would be entitled to the earned
income relief, but not so, on the reading suggested by the Department.
Now, the general intention of the section is
to give relief in cases where the income of the minor child or the wife is
included in the total income of the husband who has to pay income-tax on the
consolidated amount. Cases of wives and minors actively engaged in the conduct
of a business are very few indeed, whereas cases of fathers and husbands
actively engaged in the conduct of the business while their minor children or
wives, as the case may be, are dormant, are very numerous and of common and
natural occurrence. It is to be expected that the law is framed not for rare
cases but for cases which one encounters 108 daily in ordinary life. There is
also equity (if equitable considerations can be taken into account in a taxing
Act) in giving earned income relief to a person who has to pay tax on income
which belongs to another but which he has himself earned. In our opinion, the
section can only be read as enacting that for purposes of earned income relief,
"such income" will be included which, though it is the income of
another person, has been earned by the assessee, or, in the case of a firm,
where the assessee is a partner, by his being actively engaged as partner in
the conduct of the business. the words "'where the assessee is a
partner" must be given effect to, even when the income of the minor or the
wife is considered under the latter part, and they also point to the same
conclusion. In reading the definition in this way, no violence is done to the
language of it. The condition that the assessee must have worked actively as a
partner is thus applicable also to the latter part of the definition. In our
opinion, the High Court was right in the answer which it gave.
The appeals fail, and are dismissed with
costs.
Appeals dismissed.
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