1. This judgment will dispose of Income-tax References Nos. 123 and 124 of 1971.
2. The assessee in each of the references, at all material times relevant for the purposes of the references, was a partner of a firm called M/s. Devidutt Ramnivas which was carrying on business in ready shares and also speculation in shares. Both the assessees are brothers. During the material assessment years 1962-63 to 1965-66, the firm in the ordinary courses of its business in ready shares sold some of its stock of shares ex-dividend and the total income of the firm for all the years includes sizeable amounts of the dividends received on the shares so sold. These dividends were allocated to the partners and the dividend income was taxed in the hands of the assessees as income from other sources. The ITO held that the assessee was not entitled to any earned income relief. The ACC, however, while rejecting the contention of the assessee that dividend income should be included under the head 'Income from business', took the view that there could be earned income even in respect of income from other sources and that dividends were earned by the assessee because of his personal exertion and should be taken as earned income notwithstanding that the dividends constituted income from other sources.
3. In the appeal filed by the department, the Tribunal took the view that dividend income was generated from mere ownership of shares and not from any activity on the part of the shareholder, who having bought the share can sit back. The Tribunal, therefore, set aside the order of the AAC.
4. Arising out of this order of the Tribunal, the following question had been referred under s. 256(1) of the I.T. Act, 1961, at the instance of the assessee :
'Whether, on the facts and in the circumstances of the case, the dividend income was 'earned income' within the meaning of section 2(7)(iii) of the Finance (No.2) Act, 1962 ?'
5. The scope and meaning of the words 'earned income' in s. 2 (7) of the Finance (No.2) Act of 1962 has been considered in detail by us in CIT v. D. G. Goenka (Income-tax Reference No. 48 of 1971, decided on April 28, 1980) : 129ITR260(Bom) , where the question which fell for our consideration was whether dividend income received by the assessee on the shares held by him as stock-in-trade of his share business was earned income. We have in that case taken the view that though for the purposes of chargeability dividends fall under the classification 'income from other sources', the nature of the income from dividends in the case of an assessee who deals in shares and whose stock-in-trade consists of shares in business income because such income in the cases of a dealer in shares arises in the course of business. We have pointed out in that case that the question whether such income qualifies for being classified as earned income has to be decided on the definition in s. 2(7) of the Finance (No.2) Act, 1962. Construing the definition of 'earned income' we have observed in that decision as follows (p.269) :
'The words 'derived from' were intended to indicate that the source must be the personal exertion and the word 'immediately' which has been used clearly indicated that the income must be directly derived from personal exertion. It is vehemently contended before us on behalf of the assessee that even dividend income is directly derived from the acquisition of shares. What is, however, intended by the definition is that the dividend income must be the direct result of the personal exertion. In other words, between the personal exertion and the receipt of income in the form of dividend, there must be no intervening stage or event. The personal exertion referred to above, in the instant cases, results in acquisition of shares and the dividend is received as an incident of the ownership of the shares. Where a shareholder receives dividend in respect of the shares held by him, the dividend is received because of the fact of his holding the shares. When an assessee deals in shares and buys them in order to sell them his main activity is the purchase and sale of shares. It may no doubt be true that the possibility of earning substantial dividend from the shares is one of the circumstances which a dealer in shares takes into account. But his business really consists of purchase and sale of shares. He does not purchase shares with a view to get dividend, but the object of purchasing his shares is to earn profit by the sale of those shares. Earning of dividend is thus merely the incidental result of the main activity of the purchase of shares. Receipt of dividends does not, therefore, directly flow from any personal exertion of an assessee who is a dealer in shares.'
6. The learned counsel appearing for the assessee contended that when the assessee either buys or sells the shares, the purchase or the sale price, as the case may be, takes into account the amount of dividend and since in the case of a person dealing in shares, the amount of expected dividend constitutes an element of the price, any income in the form of dividend must be treated as resulting from the personal exertion of the assessee.
7. It is difficult for us to appreciate this contention. When dividend income is treated as falling under the heading 'Income from other sources', the income contemplated is that which arises as a result of a declaration of dividend by the company whose shares the assessee holds. It is only after the dividend is properly declared that the amount so received by the assessee can be said to be dividend income. It may be that at the time of purchasing or selling of the shares, the assessee may be making an estimate of the expected dividend income while determining either the purchase or the sale price. But, at the stage, no income arises in the form of dividend and, therefore, the argument that dividend income result from personal exertion put in at the time of either acquisition or sale of shares and must, therefore, qualify for being described as 'earned income' cannot be accepted.
8. In view of the decision referred to above, the question referred must be answered in the negative and against the assessee. The assessee to pay the costs of Reference No. 123 of 1971. There will be no order as to costs in Reference No. 124 of 1971.