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The Commissioner of Income-tax, M.P., Nagpur and Bhandara Vs. Parmanandbhai Patel and anr. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMisc. Civil Case No. 261 of 1969
Judge
Reported inAIR1978MP80; [1979]119ITR219(MP); 1978MPLJ355
ActsFinance Act, 1960 - Sections 2(6); Income Tax Act, 1922 - Sections 2(6AA), 14(2) and 16(1)
AppellantThe Commissioner of Income-tax, M.P., Nagpur and Bhandara
RespondentParmanandbhai Patel and anr.
Appellant AdvocateP.S. Khirwadkar, Adv.
Respondent AdvocateK.A. Chitale and ;B.V. Shukla, Advs.
Cases ReferredMadhya Pradesh v. Kale
Excerpt:
.....the finance act, 1960, clearly excluded from within the ambit of earned income, such income as is exempted from tax under sub-section (2) of section 14. it was held that the amount was an item of unearned income in the hands of each partner, the same being obviously included within the 'total income' as defined in the income-tax act, 1922. the assessee appealed to the income tax appellate tribunal against the commissioner's decision. the division bench thought that it would be better for a full bench to consider the correctness of that division bench decision......of unearned income in the hands of each partner, the same being obviously included within the 'total income' as defined in the income-tax act, 1922.the assessee appealed to the income tax appellate tribunal against the commissioner's decision. the tribunal upheld the assessee's contention taking the view that this amount was 'earned income' of the partner; that no income tax being payable by the partner in respect of the same by virtue of the exemption granted under section 14(2) (aa), there was no question of any surcharge being leviable under the finance act, 1960, in respect of that income. the commissioner's view was, therefore, reversed by the tribunal.3. the commissioner of income tax then applied to the tribunal for referring the above question to this court under section 66.....
Judgment:

J.S. Verma, J.

1. This reference made under Section 66 (1) of the Income-tax Act, 1922, is to answer the following question:--

'Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal rightly held that no special surcharge could be levied on the assessee's share of tax paid by the registered firm?'

In view of the, decision of a Division Bench' (Naik and Tare, JJ.) in Commissioner of Income-tax, Madhya Pra-desh v. Kalekhan Jumman Khan by legal representative Mohammad Hanif, M.C.C. No. 80 of 1969 decided on 5-11-1970 (Madh Pra), the question had to be answered in the negative when it came up for hearing before a Division Bench (Tare, C. J. and Sharma, J.). However, learned counsel for the assesses contended that the earlier Division Bench decision required reconsideration. For this reason, the Division Bench referred this matter to a Full Bench and this is how it has come before us. It is stated at the bar that with reference to the relevant period the only decision on the point is that of the Division Bench in Mohammad Hanif's case (supra) the correctness of which has been challenged on behalf of the asses-see.

2. The relevant facts are these : The assessment year is 1960-61. A registered partnership firm M/s. Mohanlal Har-govinddas of Jabalpur had only two partners, namely, Smt. Jadaobai .and Smt. Ujjambai, during the relevant period. The Income-tax Officer while assessing the income of Smt. Jadaobai and Smt. Ujjambai for the assessment year 1960-61 had not charged special surcharge amounting to Rs. 32,400 in each case on the share of income-tax paid by the registered firm falling to the share of the assessee. The Commissioner of Income-tax treating it as an omission prejudicial to the interest of revenue initiated action under Section 33-B of the Income-tax Act, 1922, and ultimately directed the Income-tax Officer to revise the order of assessment in the case of each partner by including the special surcharge of Rs 32,400 in accordance with the Finance Act, 1960 (Act No. 13 of 1960). On behalf of the assessee it had been contended that the exemption granted to a partner under Section 14 (2) (aa) of the Income-tax Act, 1922, could not be treated as unearned income, the same being earned income of the partner, as a result of which no special surcharge was leviable according to the Finance Act, 1960. The Commissioner rejected the objection taking the view that the definition of 'earned income' contained in Section 2 (6AA) of the Act read along with the other relevant provisions including Sub-Section (6) of Section 2 of the Finance Act, 1960, clearly excluded from within the ambit of earned income, such income as is exempted from tax under Sub-Section (2) of Section 14. It was held that the amount was an item of unearned income in the hands of each partner, the same being obviously included within the 'total income' as defined in the Income-tax Act, 1922.

The assessee appealed to the Income Tax Appellate Tribunal against the Commissioner's decision. The Tribunal upheld the assessee's contention taking the view that this amount was 'earned income' of the partner; that no income tax being payable by the partner in respect of the same by virtue of the exemption granted under Section 14(2) (aa), there was no question of any surcharge being leviable under the Finance Act, 1960, in respect of that income. The Commissioner's view was, therefore, reversed by the Tribunal.

3. The Commissioner of Income Tax then applied to the Tribunal for referring the above question to this Court under Section 66 (1) of the Income-tax Act, 1922. The Tribunal accepted the contention that a question of law arose requiring such a reference to be made. Accordingly, this reference has been made.

4. When the matter first came up for hearing in this Court before a Division Bench, as aforesaid, the correctness of the earlier Division Bench decision in Mohammad Hanif's case M. C. C. No. 80 of 1969, D/- 5-11-1970 (Madh Pra) (supra) was assailed by learned counsel for the assessee. Admittedly, in accordance with that decision the question has to be answered in the negative against the assessee. It is for this reason obviously that its correctness was assailed on behalf of the assessee. The Division Bench thought that it would be better for a Full Bench to consider the correctness of that Division Bench decision. It also appears that an argument was advanced before the Division Bench that no clear finding had been given by the Tribunal on the nature of this income in the hands of the partner, i. e., whether it was 'earned income' as contended by the assessee or 'unearned income' as contended by the revenue, which obviously was the only controversy between the parties throughout from its very inception. The Division Bench thought that no specific finding had been given by the Tribunal on this question even though this income of the partner had been assumed to be the 'earned income' and not 'unearned income'. For this reason, the Division Bench also called upon the Tribual to give its specific finding on the question, i. e., whether this income of the partner was 'earned income' or 'unearned income''. It was directed that the case was to be listed before a Full Bench after the additional statement of case on this point had been submitted by the Tribunal. This was the order passed by the Division Bench on 13-8-1975. Thereafter an additional statement of case dated 31-1-1976 has been submitted by the Tribunal. It has been stated therein that the department has treated this amount in the hands of the two partners as their 'earned income' and there had never been any dispute on this point so that it constituted a part of the 'earned income' of each partner. This is all that has been said in this additional statement of the case.

5. It is obvious that in making the additional statement of case, the Tribunal has totally missed the point. From the above facts stated in the initial statement of case itself, it is obvious that the real controversy between the parties throughout has been whether this amount in the hands of each partner was the partner's 'earned income' as contended by the assessee or 'unearned income' as contended by the revenue. This being the only real controversy, it is difficult to appreciate the additional statement of case saying that there was no dispute between the parties on this point. Shri K. A. Chitale, learned counsel for the assessee, stated before us that it was for us to decide the nature and character of the amount since the High Court's opinion was sought on that point and what was stated in the statement of case could be taken only as the Tribunal's opinion about its nature. This was his stand particularly in view of the arguments advanced by him which are mentioned hereafter since the consideration of those arguments itself requires a decision about the nature of this amount. The stand taken by Shri P. S. Khirwadkar, counsel for the revenue, was the same. The additional statement of case is, therefore, of no further assistance except to the extent of showing that in the Tribunal's view this amount was 'earned income' in the hands of each partner. It may be mentioned that both the original partners Smt. Jadaobai and Smt. Ujjam-bai having died, they are now represented by their legal representatives.

6. For the decision of this question, we are concerned only with the provisions of the Income-tax Act, 1922 and the Finance Act, 1960. We shall now notice the relevant provisions therein. There is no dispute before us that the only provisions relevant for our purpose are Section 2 (6AA); Section 14(2)(aa); and Section 16(1)(a) of the Income-tax Act, 1922, in addition to the provisions of the Finance Act, 1960. The dispute really is about their meaning. The relevant portions of these provisions of the Income-tax Act, 1922 are as follows:--

' 2. Definitions-- In this Act, unless there is anything repugnant in the subject or context,--

* * * *(6AA) '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 assessed under clause (b) of Sub-Section (5) of Section 23--

* * * *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.'

* * * *'14. Exemptions of a general nature,--

* * * *(2) The tax shall not be payable by an assessee--

* * * *(aa) if a partner of a registered firm, in respect of that portion of his share in the profits or gains of the firm as is equal to the difference between his share in the total income of the firm and his share in such total income excluding the income-tax, if any, payable by the firm, the share in either case being computed in the manner laid down in clause (b) of Sub-Section (1) of Section 16.'

'16. Exemptions and exclusions in determining the total income:-- (1) In computing the total income of an assessee--

(a) any sums exempted under the first proviso to Sub-Section (1) of Section 7. the second and third provisos to Section 8, Sub-sections (2), (3), (4) and (5) of Section 14, Section 15, Section 15B, Section 15C and Section 58F shall be included, and any sum exempted under Section 15A shall also be included except for the purpose of determining the rates at which income-tax (but not super-tax) is payable by the assessee to whom the exemption is given;' * * * *The relevant provisions of the Finance Act, 1960, are as follows:--

'2. Income-tax and Super-tax--(1) Subject to the provisions of Sub-sections (2), (3) and (4), for the year beginning on the 1st day of April, 1960,---

(a) income-tax shall be charged at the rates specified in Part I of the First Schedule, and, in the cases to which paragraphs A, B and C of that Part apply, shall be increased by a surcharge for purposes of the Union and a special surcharge, calculated in either case in the manner provided therein; and

* * * *(6) For the purposes of this section, and of the rates of tax imposed thereby, the expression 'total income' means total income as determined for the purposes of Income-tax or Super-tax, as the case may be, in accordance with the provisions of the Income-tax Act, and the expression 'earned income' has the meaning assigned to it in clause (6AA) of Section 2 of that Act.

The First Schedule

* *Surcharges on Income-tax

The amount of income-tax computed at the rates hereinbefore specified shall be increased by the aggregate of the surcharges calculated as under :--

* * * *(b) A special surcharge at fifteen per cent of the difference between the amount of income-tax on the total income and the amount of income-tax on the whole of the earned income, if any, included in the total income if such earned income had been the total income.'* * * *

7. The Division Bench deciding Mohammad Hanif's case M. C. C. No. 80 of 1369, D/- 5-11-1970 (Madh Pra) (supra) took the view that any income exempt from tax under Sub-Section (2) of Section 14 of the Income-tax Act, 1922 being expressly excluded from the purview of 'earned income' denned in Section 2(6AA) of the Act, it necessarily followed that the amount in question could not be treated as the earned income of the assessee partner, Consequently, it was held that the very foundation of the assessee's contention vanished and the Commissioner of Income-tax was right in holding that this amount in the hands of the assessee partner was liable to the special surcharge under the Finance Act, 1960.

8. Shri K. A. Chitale, learned counsel for the assessee, contends that the Division Bench in the above case over-simplified the problem to reach that conclusion and according to him that decision is incorrect. While inviting us to take the contrary, view, he has advanced the following arguments, namely,--

(1) For the purpose of Section 14(2)(aa) of the Act, it is a case of tax paid by the firm, i. e., an expenditure incurred by the firm on account of which it cannot be treated as any kind of income of the partner for the obvious reason that the firm's expenditure cannot be the partner's income.

(2) Both the partners of the firm being active partners thereof, the total income in their hands must be treated as entirely 'earned income' so that no part of it could be 'unearned income.'

(3) Special surcharge can be levied only when there is income-tax payable by the assessee and since this amount being exempt from payment of tax under Section 14 (2)(aa) of the Act, no tax was payable thereon, the question of levying any special surcharge on it was obviously excluded.

9. In reply Shri P. S. Khirwadkar, learned counsel for the revenue, contends that Mohammad Hanif's case M. C. C. 80 of 1969, D/- 5-11-1970 (Madh Pra) (supra) is correctly decided. He also contends that an item of income exempted from payment of tax under Section 14(2)(aa) was admittedly to be included while computing the 'total income' of the assessee as is laid down in Section 16 (1) (a) so that it was undoubtedly a part of the assessee's 'total income''; and the definition of 'earned income' in Section 2 (6AA) expressly excluded that item from within its ambit. The result, according to him, therefore, is that the item in question was part of the assessee partner's 'total income'' but not a part of her 'earned income' and consequently it was the 'unearned income' of the assesses partner. If that conclusion be right, then there is no dispute that the reference has to be answered against the assessee and the correctness of the Division Bench decision in Mohammad Hanif's case (supra) cannot be doubted.

10. On a plain reading of the relevant provisions, there can be no doubt that the argument of Shri Khirwadkar must be accepted and it ought to be held that the aforesaid Division Bench decision in Mohammad Hanif's case M. C. C. No. 80 of 1969, D/- 5-11-1970 (Madh Pra) (supra) is correct. There is no dispute that the amount in question falls within the ambit of Section 14(2) (aa) and on that basis it is exempt from, payment of tax in the hands of the assessee partner. There is also no dispute that the exemptions of a general nature provided in Section 14 relate not only to items of earned income but also to those falling Jn the category of unearned income. There is similarly no dispute that in computing the 'total income' of the assessee partner, the sum so exempted under Section 14(2) (aa) from payment of tax has to be included as provided in Section 16(l)(a). Thus far there being no controversy, it logically follows therefrom that this item is undoubtedly a part of the 'total income' of the assessee partner, computed in the manner laid down in the Act.

11. We now come to Section 2 (6AA) which defines 'earned income.' The express exclusion therefrom of 'any such income which is exempt from tax under Sub-Section (2) of Section 14 in clear and unambiguous language leaves no room for doubt that according to the definition of 'earned income' given in the Act this item constituting a part of the total income of the assessee partner cannot be included within the assessee's 'earned income'' for purposes of the Act. The Tribunal has taken the view that clause (aa) was inserted in 1956 in Sub-Section (2) of Section 14 of the Act but was not there when this definition in Section 2 (6AA) had been inserted so that the definition of 'earned income' was not intended to exclude from within its ambit an item exempted from payment of tax later by insertion of clause (aa). Incidentally this difficulty was also felt by the Division Bench deciding Mohammed Hanif's case M. C. C, No. 80 of 1969, D/- 5-11-1970 (Madh Pra) (supra) even though the Division Bench ultimately said that the legislature's omission did not alter the result. In our opinion, such a difficulty, if any, is also not real. We are actually concerned with the meaning of 'earned income' with reference to the Finance Act, 1960 which in Section 2 (6) expressly provides that the expression 'total income' means total income as determined for the purpose of income tax etc. in accordance with the I.-T. Act, 1922, and the expression 'earned income' has the same meaning assigned to it in Section 2 (6AA) of that Act. Thus, the expression 'earned income' occurring in the Finance Act, 1960 was defined with reference to Section 2 (6AA) in the l.-T. Act 1922, in this manner. This was done much after clause (aa) was inserted in 1956 in Sub-Section (2) of Section 14 of the Income-tax Act, 1922. For the purpose of levy of such surcharge under the Finance Act,' 1960 the meaning of the expressions 'total income' and 'earned income', occurring therein are of significance and the legislature left no doubt as to the meaning of both these expressions by making such a clear provision in subSection (6) of Section 2 of the Finance Act, 1960. The argument that while defining 'earned income'' in Section 2 (6AA), Section 14 (2) (aa) could not be in contemplation for the above reason, is obviously not available in this context.

12. It is, therefore obvious that the item in question forms a part of the 'total income' of the assessee partner but is not included in her 'earned income' for the purpose of the Finance Act, 1960.

13. The first argument of Shri Chitale has obviously been advanced for the first time before us. In substance, the argument is that this item is not even a part of the income of the assessee partner so that the question of its being 'earned income' or 'unearned income' does not arise. Ordinarily, there would be no occasion to permit such an argument for the first time at this stage since the substance of the question referred to us is only whether the item constitutes 'earned income' or 'unearned income' in the hands of the assessee. However, this argument has also no merit. Undoubtedly, the item being included in the 'total income' of the assessee in accordance with Section 16(1) (a) of the Act, there is no basis to contend that it does not even have the character of 'income' which is the substance of the first argument of Shri Chitale. This argument apart from being raised for the first time before us, has also no merit.

14. In our opinion, the second argument also of Shri Chitale is incorrect. He contends that both the partners of the firm being active partners, the entire amount constituting the total income of each of them must be treated as 'earned income.' In other words, he wants to equate 'earned income' with 'total income' in the case of the assessee. That it is not so is obvious from the above discussion which shows that 'earned income' is not necessarily the 'total income' of an assessee since in computation of the 'total income', Section 16 permits addition of certain items which are admittedly not included within the ambit of earned income as defined in Section 2(6AA). In view of these express provisions in the Act, the argument must be rejected.

15. The last argument is an attempt to knock out the very foundation to levy the special surcharge. If that were correct, nothing more would require consideration. In this context it would be profitable to- quote from the opinion of Chagla, C. J., in Commr. of Income-Tax, Central, Bombay v. N. M. Raiji 17 ITR 180 : AIR 1949 Bom 176 wherein the scheme of the Income-tax Act, 1922 was indicated. Admittedly, that view continues to hold the field. The relevant extracts are as follows :--

'Now, the scheme of the Indian Income-tax Act is that income, profits andgains of an assessee are liable to tax subject to certain exemptions and exceptions. Although certain sums may beexempted from taxation, still they mayform part of the total income of anassessee in order to determine the rate atwhich income-tax is payable. Therefore,it follows that the total income of anassessee is not necessarily wholly subjectto tax. Portions of it may be exemptfrom taxation and yet may be computedfor the purpose of determining the rateat which tax is payable.' (Page 184)

* * * *'The scheme is that wherever one finds an exemption or exclusion from payment of tax, the exemption or exclusion also operates for the purpose of computing the total income. Not only is the sum note liable to tax, but it is also not to form part of the total income for the purpose of determining the rate. When the Legislature intends that certain sums, although not liable to tax, should be included in the total income, it expressly so provides, as it is done in Section 16.'

(Page 185)

16. The special surcharge under the Finance Act, 1960, was levied on the difference between the amount of income tax on the 'total income' and that on whole of the 'earned income'. The definitions of 'total income' and 'earned income' by virtue of Section 2(6) of the Finance Act, 1960, as earlier indicated, were the same as in the Income-tax Act, 1922. That in computation of the 'total income', in accordance with Section 16 (1) (a) of the Act, an item which was exempt from payment of tax under Section 14 (2) (aa) was included has already been shown. The intention to recover special surcharge on items included in the 'total income' of the assessee while falling outside the ambit of his 'earned income' is manifest from the plain language of the provision. This special surcharge, as is clear from the opening words of this provision, is to be added to the amount of income tax computed at the rates specified and is an addition to the amount of income tax payable by the assessee. That such an amount is to be added for the purpose of determining the rate at which income tax is to be paid even though it is exempt from payment of tax by virtue of Section 14 (2) (aa) is common ground before us. Just as it is to be taken into account for determining the rate of income tax even though the amount itself is exempt from payment of income tax, it is undoubtedly to be taken into account as part of the 'total income' of the assessee for the purpose of calculating the special surcharge required to be paid under the Finance Act, 1960. In our opinion, there is no merit even in this contention advanced on behalf of the assessee.

17. As a result of the aforesaid discussion, we find that the conclusion reached by the Division Bench in Commr. of Income-tax, Madhya Pradesh v. Kale-khan Jumman Khan by Legal representative Mohammad Hanif M. C. C. No. 80 of 1969 decided on 5-11-1970 (Madh Pra) was correct. We have supplied additional reasons to support that conclusion in view of the correctness of the Division Bench decision being assailed on the above grounds.

18. We, therefore, answer the reference in the negative, i. e., the Income Tax Appellate Tribunal was wrong in holding that no special surcharge under the Finance Act, 1960, could be levied on the assessee's share of tax paid by the registered firm.

19. The costs of the reference shall be paid by the non-applicant assessee. Counsel's fee Rs. 300/-, if certified.

Reference answered in the negative.


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