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Haji Abdul Hameed Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 13 of 1965
Judge
Reported in[1971]82ITR495(All)
ActsIncome Tax Act, 1922 - Sections 2(6AA), 10 and 12
AppellantHaji Abdul Hameed
RespondentCommissioner of Income-tax
Appellant AdvocateP.N. Pachauri and ;Shakil Ahmed, Advs.
Respondent AdvocateB.L. Gupta and ;R.R. Misra, Advs.
Excerpt:
- - ..trustee or trustees, in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable, and all the provisions of this act shall apply accordingly :(2) nothing contained in sub-section (1) shall prevent either the direct assessment of the person on whose behalf income, profits or gains therein referred to are receivable, or the recovery from such person of the tax payable in respect of such income, profits or gains. hameed's case is a little more complicated due to the fact that he was a mutawalli as well as a beneficiary. it is necessary to ascertain whether his case can fall either under sub-clause (b) or under sub-clause (c) of clause (6aa) of section 2. clearly, the items in.....v.g. oak, c.j. 1. these are two connected references under section 66 of the indian income-tax act, 1922 (hereafter referred to as 'the act'). these references raise a common question whether receipts in the hands of beneficiaries are to be treated as earned income or not. haji abdul hameed and haji abdul shakoor are the two assessees. the assessment years are 1957-58 to 1960-61.2. one haji lal mohammad executed a deed of wakf in the year 1942. the beneficiaries under the deed of wakf were his two grandsons, shakoor and hameed. the property conveyed to the wakf consisted of a business in bidis. in the year 1947, hameed became the sole rnutawalli. under the deed of wakf, hameed and shakoor were each entitled to one-half share in the income from the business owned by the wakf. for the.....
Judgment:

V.G. Oak, C.J.

1. These are two connected references under Section 66 of the Indian Income-tax Act, 1922 (hereafter referred to as 'the Act'). These references raise a common question whether receipts in the hands of beneficiaries are to be treated as earned income or not. Haji Abdul Hameed and Haji Abdul Shakoor are the two assessees. The assessment years are 1957-58 to 1960-61.

2. One Haji Lal Mohammad executed a deed of wakf in the year 1942. The beneficiaries under the deed of wakf were his two grandsons, Shakoor and Hameed. The property conveyed to the wakf consisted of a business in bidis. In the year 1947, Hameed became the sole rnutawalli. Under the deed of wakf, Hameed and Shakoor were each entitled to one-half share in the income from the business owned by the wakf. For the assessment year 1957-58 the income from the business was fixed at Rs, 2,70,868. The shares, of Hameed and Shakoor from this income came to Rs. 1,35, 434 each. The question arose whether this income in the hands of the two beneficiaries was to be treated as their earned income. On this point, the Income-tax Officer found against the two assessees. It was held that these sums did not represent their earned income. This view was upheld in appeal by the Appellate Assistant Commissioner.

3. When the two assessees went up in appeal before the Appellate Tribunal Allahabad, the Judicial Member was of the view that the assessees' appeals should be dismissed. The Accountant Member had some doubts on the points. But, ultimately he decided to agree with the Judicial Member. The result was that the appeals by the assessees were dismissed.

4. At the instance of the two assessees, the Tribunal has referred the following question of law to this court:

'Whether, on the facts and in the circumstances of the case, the assessee is entitled to any earned income relief on the share of incomereceived by him from the business which is the subject of the wakf in his capacity as a beneficiary ?'

5. Mr. P. N. Pachauri appearing for the two assessees suggested before us that the receipts in question do not constitute income at all in the hands of the two assessees. I think, it is not open to the two assessees to raise this contention before this court. The case proceeded on the footing that the various sums were assessable as income in the hands of the two assessees. The sole question for consideration by the court is whether certain receipts are earned income or not.

6. Another question for consideration is whether the income falls under Section 10 or under Section 12 of the Act. Mr. Pachauri contended that it is not open to the department to raise this point before the court, as it was understood throughout that this was business income. I note that the Appellate Assistant Commissioner disposed of the appeal before him on the footing that the source of income in the hands of the beneficiary was the right under the deed of wakf. It was not business income in the assessee's hands. This question was again considered by the Accountant Member. It is true that he concluded that the matter fell under Section 10 of the Act. But he found it necessary to discuss the question whether the case fell under Section 10 or under Section 12. In the assessment order the word 'business' was noted against the item of Rs. 1,35,434. But there was no clear indication whether this item fell under Section 10 or under Section 12. Considering the entire proceedings before the various authorities, it is not correct to say that the department conceded that the receipts were business income in the hands of the two assessees. It is now necessary to consider whether the receipts fell under Section 10 or under section !2 of the Act.

7. In A. Razzak v. Commissioner of Income-tax, [1963] 48 I.T.R. 276 (Cal.) the assessee's father carried on business and created a trust for carrying on the business for the benefit of the assessee and his three brothers. The founder appointed himself as the trustee. It was held that the income from the business was not assessable under Section 10 of the Act in the hands of the trustee as an individual carrying on business.

8. In the Commentary on Income-tax by Kanga and Palkhivala, 4th edition it is observed on page 424 ;

'A periodic allowance, payable under some legal custom, usage, contract, order of the court or other binding obligation, would be taxable under Section 12 of the Act.'

9. Rani Amrit Kunwar v. Commissioner of Income-tax, [1946] 14 I.T.R. 561 (All.) [F.B.] is a Full Bench decision of the Allahabad High Court. In that case it was observed, on page582:

'If, however, the husband is bound to pay a certain sum periodically under an order of a court or under an agreement, the order or the agreement may be deemed to be the source of the income.'

10. In Commissioner of Income-tax v. Lal Suresh Singh, [1935] 3 I.T.R. 396 (Oudh Chief Court) the holder of an impartible estate agreed to pay a certain monthly allowance to his younger brother and his heirs for their maintenance out of the income of the estate, in consideration of the latter giving up all claims to any share in the estate. It was held that the maintenance allowance so paid out of the income of the estate was not agricultural income.

11. It may be pointed out that in the present cases we are concerned with the receipts in the hands of the two assessees in their capacity as beneficiaries. The source of their receipts is a deed of wakf, dated March 14, 1942. The fact that certain business is being conducted on behalf of the wakf has no direct bearing on the nature of the receipts in the hands of the assessees. In my opinion, the income in question falls under Section 12 of the Act, and not under Section 10.

12. In order to decide whether this is earned income or not, it is necessary to examine carefully two provisions of the Act. The first provision relates to assessment of trustees and beneficiaries. This provision is contained in Section 41 of the Act. Section 41 states:

'(1) In the case of income, profits or gains chargeable under this Act which. . .. any trustee or trustees ... are entitled to receive on behalf ofany person, the tax shall be levied upon and recoverable from such...... trustee or trustees, in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable, and all the provisions of this Act shall apply accordingly :..........

(2) Nothing contained in Sub-section (1) shall prevent either the direct assessment of the person on whose behalf income, profits or gains therein referred to are receivable, or the recovery from such person of the tax payable in respect of such income, profits or gains.'

13. In the instant cases the two assessees have been assessed with respect to their income as beneficiaries. Their cases are governed by Sub-section (2) of Section 41 of the Act.

14. The expression 'earned income' has been defined in Clause (6AA) of Section 2 of the Act:

''Earned income' means any income of an assessee who is an individual, . . .-

(a) which is chargeable under the head 'salaries' ; or

(b) which is chargeable under the head 'profits and gains of business, profession or vocation' whether the business, profession or vocation is carried on by the assessee ....

(c) which is chargeable under the head 'other sources' if it is immediately derived from personal exertion or represents a pension...'

15. I now proceed to discuss the cases of the two assessees separately. Abdul Shakoor's case presents little difficulty. It is clear that he did not carry on any business, He received money as a beneficiary. As explained above, the receipts in Shakoor's hands are not business income; Shakoor did not carry on any business. Consequently, his case cannot fall under sub-Clause (b) of Clause (6AA) of Section 2 of the Act. Although the receipts amount to income from 'other sources', Shakoor did not exert himself for earning this money. He is merely a beneficiary under the deed of wakf. Consequently, Shakoor's case will not fall under Sub-clause (c) either. The receipts in the hands of Abdul Shakoor are not his earned income.

16. I now pass on to consider Abdul Hameed's claim for earned income benefit. Hameed's case is a little more complicated due to the fact that he was a mutawalli as well as a beneficiary. It is necessary to ascertain whether his case can Fall either under Sub-clause (b) or under Sub-clause (c) of Clause (6AA) of Section 2. Clearly, the items in dispute are not covered by sub-Clause (a) of Clause (6AA) of Section 2.

17. It is true that, as mutawaili, Hameed carried on bidi business. It is possible to look upon the receipts in the hands of the mutawaili as business income. But it is necessary to emphasise that in the instant case we are concerned with the receipts in Hameed's hands as a beneficiary. As explained above, the source of this receipt is not the business, but the deed of wakf. Since the receipts under consideration do not fall under the head 'profits and gains of business', Hameed cannot bring his case under Sub-clause (b) of Clause (6AA) of Section 2.

18. It is true that the receipts are Hameed's income from 'other sources', Thus, the first condition of Sub-clause (c) of Clause (6AA) is satisfied in Hameed's case. But the assessee has to further establish that the receipts in question were immediately received by him from personal exertion. It is true that Hameed exerted himself for earning money as a mutawaili. But in the instant case we are concerned with Hameed's income as a beneficiary and not his income as a mutawaili. The word 'immediately' appearing in Sub-clause (c) is significant. The word 'immediately' denotes direct connection between the personal exertion and the receipts in the hands of the assessee. In the instant case the money was initially earned from business by Hameed as mutawaili for the wakf. Under the deed of wakf, he had to distribute the receipts from business between the two beneficiaries. It is true that Hameed himself is a beneficiary. But we cannot overlook the fact that we are concerned with the receipts in Hameed's hands as a beneficiary. It cannot be said that the receipts in Hameed's hands as a beneficiary were the immediate result of his personal exertion, Consequently, Hameed's case is not covered by Sub-clause (c) either. Both the assessees fail.

19. In my opinion, in each of the two cases the question referred to the court ought to be answered in the negative and against the assessee.

20. H.N. Seth, J.

21. I have carefully read the judgment prepared by the learned Chief Justice, but regret my inability to concur in all that he has staled therein.

23. The assessees in these two connected references are Haji Abdul Hameed and Haji Abdul Shakoor, grandsons of Haji Lal Mohammad. Haji Lal Mohammad owned substantial bidi business. On 14th March, 1942, he executed a wakfnama creating thereby a wakf-alal-aulad in respect of the bidi business. Under this wakf deed the mutawalli was authorised to manage the business and after spending an amount of Rs. 79-1-0 per annum on certain charities, he was to distribute the rest of the income amongst the male descendants of the two sons of the wakf half and half. The deed provided that the mutawalli was to be appointed from amongst the descendants of Haji Abdul Majid and Haji Abdul Ghafoor, the two sons of the wakf. It made it clear that the person entitled to act as a mutawalli had also to be one of the beneficiaries under the deed.

24. In due course Haji Abdul Hameed became mutawalli entitled to manage the business and to distribute its income between him and his cousin brother, Haji Abdul Shakoor, after meeting the expenses mentioned in the deed.

25. While making the assessment of Haji Abdul Hameed and Haji Abdul Shakoor for the assessment years 1957-58 to 1960-61, one of the questions that arose for consideration was whether in respect of the share income derived by the two assessees from the bidi business which was the subject-matter of the wakf under the deed, dated 14th March, 1942, the two assessees were entitled to the benefit of earned income relief under the Income-tax Act, 1922. The Income-tax Officer did not give the benefit of earned income relief to any of the two assessees. In appeal, the Appellate Assistant Commissioner of Income-tax affirmed the action taken by the Income-tax Officer.

26. The assessees then went up in appeal before the Income-tax Appellate Tribunal. At that stage the two Members constituting the Tribunal delivered separate orders confirming the action taken by the Income-tax Officer. The Judicial Member was clearly of the opinion that the two assessees were not entitled to the benefit claimed by them. The Accountant Member, however, felt doubtful. According to him there was considerable force in the argument raised on behalf of the assessees but as there was no direct authority on the issue raised in the case, he did not consider it necessary to differ from the conclusions arrived at by the Judicial Member. In the result the Income-tax Tribunal upheld the action of the Income-tax Officer in denying the relief for earned income relief claimed by the two assessees.

27. At the instance of the assessees the Tribunal has made references under Section 66(1) of the Indian Income-tax Act, 1922. The reference at the instance of the assessee, Haji Abdul Hameed, has been numbered as 13 of 1965, whereas that made at the instance of Haji Abdul Shakoor has been numbered as 201 of 1965. The following question of law has been referred by the Tribunal in both these cases :

'Whether, on the facts and in the circumstances of the case, the assessee is entitled to any earned income relief on the share of income received by him from the business which is the subject of the wakf, in his capacity as a beneficiary ?'

28. The main controversy between the parties is whether the income received by the two assessees is covered by the expression 'earned income' as defined in Section 2(6AA) of the Indian Income-tax Act, 1922.

29. Section 2(6AA) reads as follows :

''Earned income' means any income of an assessee, who is an individual, Hindu undivided family, unregistered firm or other association of persons not being a company, a local authority, a registered firm or a firm treated as registered under Clause (b) of Sub-section (5) of Section 23-

(a) which is chargeable under the head 'salaries' ; or

(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; or

(c) which is chargeable under the head 'other sources' if it is immediately derived from personal exertion or represents a pension or superannuation or other allowance given to the assessee in respect of his past services of any deceased person ;

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.'

30. In order to determine whether the income received by the two assessees can be said to be earned income it has to be found whether the income falls under the categories of salaries, profits and gains of business, profession or vocation or is chargeable under the head 'other sources'. If the income comes within the head 'salaries' the assessee will be entitled to get it classed as earned income without anything more. If it is chargeable under the head 'profits and gains of business, profession or vocation' the assessee, before he can get it classed as earned income, will have to show that the profession or vocation was carried on by him. If, however, the income derived by the assessee is covered under the head 'other sources' the assessee will have to show that the income was immediately derived from his personal exertion.

31. At this stage, it may be noticed that in its statement of case, he Tribunal has made the following observation :

'The case proceeded before the Tribunal on the footing that Hameed and Shakoor were each entitled to a half share in the income covered by the wakf deed. The order made by the Judicial Member also shows that he proceeded to decide the case on the footing that the income in question was one which was chargeable under the head 'profits and gains of business, profession or vocation'.'

32. The point which appears to have been argued on behalf of the department, before the Tribunal, was that the two assessees were being assessed in their capacity as beneficiaries under the wakf deed. As beneficiaries they were not carrying on the business, profits and gains of which were being divided amongst them. The capacity of Abdul Hameeed as a mutawalli was distinct from that of his capacity as a beneficiary. In the circumstances, it could not be said that the assessee was carrying on the business within the meaning of Section 2(6AA).

33. The order made by the Accountant Member, however, shows that before the Tribunal an attempt was made on behalf of the department to argue that the income in question represented the asesssee's income which was taxable as income from other sources, i.e., under Section 12 and not as income falling under Section 9 or Section 10 of the Act. The Accountant Member pointed out that the assessment had not been made in the manner suggested by the department. According to him the total income had been computed under Sections 7, 9 and 10 of the Act. The department's case that the business income of the wakf which has been shared by the two assessee should be treated as income under Section 12, as income from 'some other source' was wrong and deserved to be rejected. In his opinion the Income-tax Officer was right in treating the income under the head 'business income'.

34. Before us, Sri Briji Lal Gupta, learned counsel for the department, argued that in fact the income in question should have been classified as income from some other sources. It is on this footing that the question whether the assessees are entitled to the benefit of earned income relief should be decided. In support of his contention that, in the circumstances like those of the present case, the income of the assessee should be treated as being derived from 'some other source' within the meaning of the Income-tax Act, he relied upon the cases of Rani Amrit Kunwar v. Commissioner of Income-tax, [1946] 14 I.T.R. 561 (All). [F.B.], Commissioner of Income-tax v. Lal Suresh Singh, [1935] 3 I.T.R. 356 (Cal.), (Oudh Chief Court) and Kedar Narain Singh v. Commissioner of Income-tax, [1938] 6 I.T.R. 157(All.).

35. Sri P. N. Pachauri, learned counsel for the two assessees, however, argued that as a matter of fact the amount received by the two assessees as beneficiaries under the wakf deed cannot be considered to be their income which is liable to be taxed under the Income-tax Act, 1922. He urged that the amount that was being received by the two assessees was in the nature of gift from the original donor. He also advanced an alternative argument and contended that the amount was being received by the two assessees as annuity, in which case it would be covered under , the head 'salary' as enumerated in section? of the Indian Income-tax Act, 1922, and therefore, in any case both the assessees are entitled to classify it as earned income under Section 2(6AA)(a) of the Act.

36. In my opinion, neither the counsel for the department nor the counsel for the assessee is entitled to ask this court to give its opinion on the question referred, on any basis other than that the income chargeable in the hands of the two assessees was one which fell under the head 'profits and gains of business, profession and vocation'.

37. As mentioned earlier the Tribunal decided the case on the footing that the income in the hands of the two assessees was the income which could be classified under the head 'profits and gains of business'. The Judicial Member clearly said that the case proceeded on this footing whereas the Accountant Member repelled the argument raised on behalf of the department that the case should be decided on the footing that the income in question was not 'business income' but was income from some 'other source' within the meaning of Section 12 of the Act. Neither the assessee nor the department has got a question, that the two Members of the Tribunal were wrong in treating the source of the assessee's income as the carrying on of business, referred to this court. That question is not before us for opinion. In the circumstances, it is not possible for this court to go into the question whether the source from which income was received by the two assessees was the carrying on of business or was some other source.

38. Similarly, the learned counsel for the assessee also cannot be permitted to argue that the receipt in the hands of the assessee was not an income taxable under the Act or that it should be treated as income under the head 'salary'. The order made by the Judicial Member shows that at the time of hearing of the appeal before the Tribunal, learned counsel for the assessee tried to raise the argument that the income in question was not liable to tax at all. This point has not been raised on their behalf at any earlier stage, and the Tribunal did not permit them to raise it during the hearing of the appeal. Since the argument that the income in question was not taxable was not permitted to be raised by the Tribunal and the question referred to this court proceeds on the basis that the assessee's income is taxable and the only thing to be considered is whether the two assessees as beneficiaries are entitled to the benefit of earned income relief, I do not think that the learned counsel for the assessee can be allowed to agitate this point in this reference application.

39. Although, in my opinion, the question referred to us should be decided only on the footing that the source of income of the two assessees was the carrying on of business, still as the learned Chief Justice has expressed an opinion that in this particular case the assessees' source of income shouldhave been classified as from some 'other source', I proceed to examine whether the income in the hands of the two assessees can be described as earned Income as defined in Section 2(6AA)(b) and Section 2(6AA)(c).

40. According to Section 3 of the Indian Income-tax Act, 1922, subject to the provisions of the Act, income-tax is chargeable in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority and of every firm and other association of persons or partners of the firm or the members of the association individually. It will thus be seen that the units of assessment for the purpose of income-tax contemplated by the Act are :

(1) Individual ;

(2) Hindu undivided family ;

(3) Company and local authority ;

(4) Firm and other association of persons or the partners of the firm or the members of the association individually.

41. According to Section 2(15) the expression 'total income' means the total amount of income, profits and gains referred to in Sub-section (1) of Section 4 computed in the manner laid down in the Act and it includes all income, profits and gains wherever accruing or arising except income to which, under the provisions of Sub-section (3) of Section 4, the Income-tax Act does not apply and except any capital gain which is not includible in the total income of the assessee. The relevant portion of Section 4(1) of the Act provides that the total income of any person includes all income, profits and gains from whatever source derived and which are received or deemed to be received in the taxable territories in such year by or on behalf of such person. A perusal of Sections 3 and 4 of the Act shows that the unit of assessment is an individual and all the income, profits and gains derived by him from any source whatsoever, which are received or deemed to be received by him or on his behalf, will be included in his total income.

42. It does not make any difference as to in what capacity he receives the income. Subject to the provisions of the Act, every income received by an individual in any capacity, whatsoever, has to be included in his total income. In Sections 40 and 41 of the Indian Income-tax Act, provision has been made about the extent to which the income which is received by a guardian, trustee, courts of wards, administrator-general, the official trustee or any receiver or manager (including any person, whatever his designation be, who in fact manages property on behalf of another) appointed by or under any order of the court, or any trustee or trustees appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including the trustee or trustees under any wakf deed which is valid under the Mussalman Wakf Validating Act, 1930) may be computed and charged to tax.

42. In order to determine whether the two assessees are entitled to claim that the income received by them can be classified as earned income within the meaning of Section 2(6AA), treating it as income chargeable under the head 'profits and gains of business, profession or vocation' the relevant portion of that section may be read as follows :

''Earned income' means any income of an assessee who is an individual, 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.'

43. In the case before us it is not disputed that the income which has been subjected to tax is the income of an individual. We may take it that the income received by the individual is chargeable under the head 'Profits and gains of business, profession or vocation' inasmuch as, as explained earlier, we have to decide the case on the footing that the income is chargeable under this head. The only question that remains to be determined is whether the business was being carried on by the two assessees or not. In case it is held that the business is carried on by a particular assessee he would be entitled to get the income received by him classed as earned income within the meaning of Section 2(6AA)(b).

44. As stated earlier, the two assessees in these cases are two individuals, Abdul Hameed and Abdul Shakoor. It is not disputed that Abdul Hameed carried on the business from which the income was earned. What was argued on behalf of the department was that, even though Abdul Hameed might have carried on the business, but he did so in his capacity as a mutawalli which is different from his capacity as a beneficiary in which he was being taxed. As explained above an individual is one class of assessee contemplated by the Indian Income-tax Act. The Act does not further sub-divide this unit of assessment into sub-units in accordance with the capacity in which the individual earns income. It may be that where an individual earns income in two different capacities, the Act may provide for a special mode of assessment, but the individual continues to be assessed as an individual. The fact that he earns income in two different capacities does not mean that he becomes two different individuals or two different assessees. For the purposes of considering whether Abdul Hameed is entitled to the benefit of earned income relief or not the only thing that has to be seen is whether the business which was the source of income in his hands was carried on by him or not. The capacity in which the business was carried on is immaterial.

45. Learned counsel for the department was not able to cite even a single authority in which it has been held that where under a wakf deed one of the beneficiaries is enjoined to act as a mutawalli, he as a mutawalli becomes a juristic personality, different from his personality as beneficiary. A perusal of the wakf deed shows that the power of managing the bidi business was reserved for a suitable beneficiary. In effect the wakf deed postulates that one of the beneficiaries will manage the business and then after meeting certain expenses he will distribute its income amongst all the beneficiaries. As the beneficiary in question manages the business he is also known as mutawalli. But it does not mean that there is any split in his personality or that he become a different assessable unit. In my opinion, therefore, there is no escape from the position that Abdul Hameed, who was the assessee, carried on the business from which he received the income which is now being subjected to tax and the income in his hands can be classed as earned income within the meaning of Section 2(6AA)(b).

46. In support of his contention that the assessee, Abdul Hameed, should be taken as a different individual in his capacity as a mutawalli from that in his capacity as beneficiary, learned counsel for the department relied upon the case of A. Razzak v. Commissioner of Income-tax, [1963] 48 I.T.R. 276 (Cal.). In this case, the assessee, Abdul Razzak, was one of the beneficiaries under a deed of trust, dated 20th March, 1937, executed by one Bobarally Sardar. Subsequently, he was also appointed to be a trustee. The Income-tax Officer assessed the trustee as an association of individuals but divided the income received from the trust in four equal share representing the share of each individual beneficiary. In appeal the Commissioner cancelled the order of the Income-tax Officer and directed that the tax payable by the assessee should be computed under the provisions of Section 10(1) of the Act as an individual. The order implied that the whole income derived by the assessee from the trust property was to be taxed as as one unit, ignoring the provisions of sectional of the Income-tax Act. The Tribunal endorsed the decision arrived at by the Commissioner, The Calcutta High Court came to the conclusion that Section 41 of the Indian Income-tax Act was fully applicable to the facts of the case and that the tax should have been determined in accordance with the provisions of that section. This case is no authority for the proposition that if the very same individual happens to be a trustee as also a beneficiary, he has two different legal personalities and he becomes two different assessees.

47. Reliance was also placed on the case of Fry Survivor of Taxes v. Shield's Trustees', [1914] 6 T.C. 583 wherein it has been held that where a business was being carried on on behalf of two minors who were beneficiaries under a will and the whole of the net profits of the business were annually paid over to or on behalf of the beneficiaries, it was held that the business was not the property of the beneficiaries but of the trustees, that the profits of the business were not earned by the beneficiaries and were not immediately derived by them from the carrying on of the trade within the meaning of Section 19 of the Finance Act, 1907, and that the benefit of the relief in respect of earned income on the profits in question could not be allowed.

48. Similarly, in the case of Ronald M' Dougalt v. S. C. H. Smith, [1918] 7 T.C. 134 it was held that where a business is carried on, on behalf of a lunatic ward, by a Curator Bonis who in this capacity was assessed to income-tax under Schedule D in respect of the profits, it was held that the profits of the business was not 'earned income' of the ward within the meaning of Section 19(7) of the Finance Act, 1907.

49. It will be noticed that in neither of the two cases, the two capacities of the trustee and beneficiary and guardian and ward were combined into one assessee or the same individual. The problem that has arisen in the case of the assessee, Haji Abdul Hameed, did not arise there.

50. In my opinion, Abdul Hameed was entitled to earned income relief, as the income received by him could be classed as earned income under Section 2(6AA)(b).

51. Coming now to the case of Haji Abdul Shakoor, I find that he was not given any authority to manage or to carry on the business under the wakf deed. Although the source which yielded income was the carrying on of business, still it cannot be said that the business was carried on by him. Principles underlying the decision in the cases of Fry v. Shield's Trustees, [1914] 6 T.C. 583 and Ronald M' Dougall v. S. C. H. Smith, [1919] 7 T.C. 134 fully apply to his case,

52. Sri P. P. Pachauri argued that under Section 10 of the Indian Income-tax Act, tax is payable by an assessee under the head 'profits and gains of business, professsion or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. He argued that the expression 'profession or vocation is carried on by the assessee' in Section 2(6AA)(b) has been used in the same sense in which it has been used in Section 10 of the Act. If the business is owned by the assessee it does not matter whether he carries it on personally or through some one else. He suggested that in this case the income in the hands of Abdul Shakoor has been treated as his business income, i e., an income taxable under Section 10 of the Act. This implied that according to the revenue authorities the business which yielded income was being carried on by the assessee. As the business was being carried on by the assessee, the income derived from that business was his earned income. It may be that the expression 'business, profession or vocation carried on by him' has been used in Section 2(6AA) in the same sense in which it has been used in Section 10 of the Act, and that it is not necessary that the assessee should personally carry on the business before it can be said that he is carrying on the business. But, before it can be said that the assessee is carrying on the business, it must be shown that the assessee exercises some sort of control over the conduct of or over the carrying on of the business. Under the wakf deed, apart from the beneficiary who has been authorised to manage the business and who has been termed as at mutawalli, no other beneficiary has been authorised to exercise any control over the conduct of or in running the business. In the circumstances, it cannot be said that the assessee, Haji Abdul Shakoor, was carrying on the business which yielded the income in question. The business from which the income was derived is not owned by the assessee. It has been held by the Supreme Court in the case of Commissioner of Income-tax v. Puthia Ponmanichintakam Wakf, [1962] 44 I.T.R. 172 ; [1962] 3 S.C.R. 137 (S.C.) that even though the real owner of the wakf business may be God Almighty, still for purposes of Section 41 of the Income-tax Act, it will be deemed that the income was derived on behalf of the beneficiary. This decision, however, does not mean that a business carried on behalf of a beneficiary is either owned or is carried on by him. We are not concerned with the question whether the revenue authorities were right in treating the income derived by Haji Abdul Shakoor as business income instead of income from some other source.

53. It is therefore, clear that Haji Abdul Shakoor is not entitled to the benefits of earned income relief by virtue of the provisions of Section 2(6AA)(b) of the Act.

54. Even if the source of income of the two assessees is not treated to be business but is treated as 'some other source' as contended on behalf of the department, it will be seen that the income which was received by Abdul Hameed was in fact derived by him as a result of his personal exertion. In the present case, the assessee is the individual, Abdul Hameed, whose personal exertion has yielded the income. As explained earlier, Haji Abdul Hameed who has been assessed as an individual does not become a different assessee depending upon the capacity in which he is assessed (whether as a mutawalli or as beneficiary). The income derived as a result of personal exertion of the assessee, Abdual Hameed, will continue to be the income from his personal exertion irrespective of the capacity in which the exertion was made. The real scheme under the wakf deed was that one of the beneficiaries was to manage the business and derive its income. After deriving it, he was to retain a part of that income with himself and give away the other part to the remaining beneficiary or beneficiaries, as the case may be. Personal exertion of Abdul Hameed being there in deriving the income, the income received by him could be clearly classed as earned income within the meaning of Section 2(6AA)(c).

55. The argument that since the income was derived by personal exertion of the assessee as a mutawalli and was retained by him as a beneficiary, it ceased to be an income immediately derived by the assessee from personal exertion, does not appeal to me. The expression 'if it is immediately derived from personal exertion' merely means that the income is the immediate result of the personal exertion made by the assessee. The section does not contemplate any difference in the capacity in which the assessee makes the personal exertion which yielded the income. I am, therefore, of opinion that the income in the hands of Abdul Hameed will be earned income even under Section 2(6AA)(c) of the Indian Income-tax Act.

56. So far as the case of Abdul Shakoor is concerned I find that the income derived by him was not as a result of any personal exertion made by him, Haji Abdul Shakoor did not take any part in carrying on the business and in earning the income, It was distributed to him under the provisions of the wakf deed after it had been earned by the personal exertions of Abdul Hameed. In the circumstances he is not entitled to get the income in his hands treated as earned income within the meaning of Section 2(6AA)(c) of the Act.

57. In the result, I hold that, in the facts and circumstances of the case, Haji Abdul Hameed is entitled to earned income relief on the share of income received by him from the business which is the subject of the wakf in his capacity as a beneficiary, but Haji Abdul Shakoor is not.

58. In the result, I would answer the question referred to this court in I.T.R. No. 13 of 1965 in the affirmative and in favour of the assessee ; my answer to the question referred to us in the connected Income-tax Reference No. 201 of 1965 is in the negative and against the assessee.

By The Court

59. In view of the difference of opinion, we refer this case to a third judge.

Pathak, J.

60. This reference comes before me on a 'difference of opinion on the following question ;

'Whether, on the facts and In the circumstances of the case, an assessee is entitled to any earned income relief on the share of income received by him from the business which is the subject of wakf in his capacity as a beneficiary ?'

61. The facts briefly are these. On March 14, 1942, Haji Lal Mohd. executed a wakf deed in respect of his bidi business and some house property. The bidi business was valued at Rs. 40,000. The beneficiaries under the wakf were Haji Lal Mohd.'s grandsons, Abdul Hameed and Abdul Shakoor. Each was entitled to a half share of the income from the business. The first mutawalli under the wakf deed was Haji Lal Mohd. and after him his wife. On February 13, 1947, the Haji and his wife surrendered their rights as mutawallis and Abdul Hameed become the sole mutawalli in accordance with the terms of the wakf deed. As mutawalli, he was entitled to a remuneration of Rs. 350 per annum, and as beneficiary he was entitled to a half share in the income from the bidi business.

62. In assessment proceedings for the assessment years 1957-58 to 1960-61, with which this reference is concerned, Abdul Hameed claimed earned income relief on his share of the business profits. Taking the case for the assessment year 1957-53 as representative of the years under consideration, it may be mentioned that the half share of the assessee for that year amounted to Rs. 1,35,434. The Income-tax Officer rejected the claim to earned income relief and made the assessment accordingly. A copy of the assessment order, annexed to the statement of the case, shows that the assessment was made on Abdul Hameed as a beneficiary. The assessee appealed to the Appellate Assistant Commissioner, and thereafter to the Income-tax Appellate Tribunal. The appeals were dismissed.

63. At the instance of the assessee, the present reference has been made to this court under Section 66(1) of the Indian Income-tax Act, 1922. Upon the hearing of the reference, the learned Chief Justice held that the share of the assessee as a beneficiary from the profits of the business could not be treated as 'earned income' under either Clause (b) or Clause (c) of Subsection (6AA) of Section 2. H. N. Seth J. expressed the view that it could be considered under either clause.

64. Before proceeding further, it is desirable, I think, to set out Sub-section (6AA) of Section 2. It reads :

'' Earned income' means any income of an assessee who is an individual, Hindu undivided family, unregistered firm or other association ofpersons not being a company, a local authority, a registered firm or a firmassessed under Clause (b) of Sub-section (5) of Section 23-

(a) which is chargeable under the head 'salaries' ; or

(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 ; or

(c) which is chargeable under the head 'other sources' if it is immediately derived from personal exertion or represents a pension or superannuation or other allowance given to the assessee in respect of his past services or the past services of any deceased person ;

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 Sub-section(2) of Section 14 or under a notification issued under Section 60.'

65. The expression 'earned income' has been used in contradistinction to 'unearned income'. Broadly speaking, earned income is that which is derived by the personal effort or exertion of the assessee, while unearned income can be described as income arising without necessarily requiring personal effort or exertion. The definition of 'earned income' in the Act points to this distinction. The heads of income considered for this purpose are 'salaries', 'profits and gains of business, profession or vocation' and 'other sources' where personal exertion is responsible for the income.

66. Unearned income includes 'income from property', 'income from securities' and 'capital gains'. From 1945 the Finance Acts began to draw a distinction between earned income and unearned income. A lighter burden of tax was laid on earned income and a heavier burden on unearned income.

67. Turning to the facts of the present case, there can be no dispute that the amount of Rs. 1,35,434 received by the assessee must be attributed to his right as a beneficiary under the wakf deed. It is true that the amount flows from the profits of the business. But between its origin in the business and its receipt in the hands of the assessee, a document of title is interposed, and that is the wakf deed. The nature of the title giving rise to the receipts governs the nature of the receipt. The assessee was assessed as a beneficiary, as is plain from the assessment order, and the receipt by him of Rs. 1,35,434 arose to him under the wakf deed. It did not arise to him by virtue of any right as manager of the business. As beneficiary, he enjoyed no right to manage the business. It was only as mutawalli that he could be said to do so. His management of the business as mutawalli resulted in the earning of profits. By virtue of the wakf deed the net profits were liable to distribution among the beneficiaries. And a part of those profits were received by the assessee as a beneficiary.

68. It is urged on behalf of the assessee that the beneficiary alone could be appointed mutawalli and, therefore, the beneficiary must be considered as running the business. That is not a situation which can be contemplated in law. The circumstance that an individual who is a beneficiary is selected for appointment as mutawalli does not obliterate the distinction between the two capacities. H. N. Seth J. has pointed out that no distinction can be drawn between the assessee as rnutawalli and the assessee as a beneficiary when the law contemplates the assessments on the individual without regard to the different capacities in which different receipts have been earned. With great respect, it seems to me that the distinction is relevant when the question is whether the income falls within the scope of Section 2(6AA). For the purpose of that provision, the nature and character of the income is material. It is only if it is chargeable under the head 'salaries' or 'profits and gains of business, profession or vocation' or 'other sources' (if the income is derived from personal exertion) that the income can be considered as 'earned income'. The nature and character of the income is determined by the capacity in which the recipient receives it, and the capacity in which he receives it is determined by the title on the basis of which he derives it. The remuneration received as mutawalli can be described as 'earned income' but the receipt of the share as beneficiary cannot be so described. The beneficiary did not carry on the business, and, therefore, the amount cannot be described as 'profits and gains of business'. It is pointed out on behalf of the assessee that the assessment order specifically describes the amount as proceeding out of 'business'. I am unable to read that statement in the assessment order as anything more than a description of the original source of the receipt. By so describing the amount the legal nature of the receipt cannot be affected. As the receipt cannot be considered as 'profits and gains of business, profession or vocation', it does not fall under Clause (b) of Sub-section 6(AA) of Section 2.

69. The receipt arose to the assessee by virtue of the wakf deed, and must, therefore, be considered as income from 'other sources'. But as it was derived by the assessee as a beneficiary, no personal exertion was involved. The words 'immediately derived from personal exertion' in Clause (c) of Sub-section (6AA) of Section 2 are significant. They imply that the immediate source of the income must be an activity requiring personal exertion by the assessee. In the present case, although the profits arose originally from the business, the immediate source of the receipt in the hands of the assessee as beneficiary is the wakf deed. And, in that case, no personal exertion is involved. Therefore, the receipt cannot qualify as 'earned income' under Clause (c) of Sub-section (6AA) of Section 2.

70. Upon the aforesaid consideration, I hold that the assessee is not entitled to any earned income relief on the share of income received by him from the business in his capacity as a beneficiary. In this opinion, Ifind myself in agreement with the learned Chief Justice. I answer the question referred in the negative.

71. The papers of the case will now be placed before the Bench for finaldisposal.

By The Court

R. S. Pathak and H.N. Seth JJ.

(3-5-1971)

72. In view of the opinion of the third judge the question referred is answered in the negative, in favour of the Commissioner of Income-tax and against the assessee. The Commissioner is entitled to his costs which we assess at Rs. 200. Counsel's fee is assessed at the same figure.


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