1. The assessee, Marimuthu Nadar, and his divided sons entered into a partnership on 1661946. On that date two of the divided sons, Bhaskara and Rajasekhara, were minors, and they were admitted to the benefits of the partnership.
2. In the assessment year 194050, the previous year having ended on 1681948, the share of Marimuthu in the profits of the partnership came to Rs. 9812, in computing his assessable total income, the shares of the minors, Bhaskara and Rajasekhara amounting to Rs. 8124 and Rs. 8381, were added under the provisions of Section 16 (3)(a)(ii) of the Act. The assessee, however, was granted earned Income relief only on the basis of his individual share Rs. 9812.
3. In the assessment year 195051, the share of the assessee Marimuthu in the profits of the partnership amounted to Rs. 12344. Bhaskara had meanwhile become sui juris. Under the provisions of Section 16(3)(a)(ii) Rajasekhara's share Rs. 10143 was included in computing the total income of Marimuthu. But the assessee was granted earned income relief only on the basis of his own share, Rs. 12344.
4. The assessee's contention, that earned Income relief should be calculated also with reference to the share income of his minor sons, was negatived by the departmental authorities. That was confirmed by the Tribunal. A consolidated reference was made for both the assesseemnt years, and the question referred to this Court under Section 66(1} of the Act ran:
"Whether the assessee is entitled to earned income relief on the share income of the two minor sons for 194950 assessment year and on the share income of the one minor son for 195051 assessment year included in the computation of the total income of assessee under the provisions of Section 16(3) (a) (ii) of the Incometax Act."
5. The liability of the assessee for the Inclusion of the income of his minor sons in computing his total income under the provisions of Section 16(3)(a) (ii) was never in dispute, though it was found that the capital that was contributed to the partnership on behalf of the two minor sons, Bhaskara ana Rajasekhara, belonged to them. The ownership of the share income of Bhaskara and Rajasekhara Vested in them, but the incidence of the tax fell on the assessee under Section 16(3)(a)(ii). The question at issue, what should be the basis for computing the earned income relief has to be answered with reference to the definition of "earned income" in Section 2(6AA) of the Incometax Act. The relevant portion of Section 2 (6AA) runs:
"Earned income means any income of the assessee who is an individual ........ (b) which is chargeable under the head 'Profits and Gains of Business, profession or vocation' where the business, profession or vocation is carried on by the 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; ...... and Jn. dudes 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....."
6. The question referred to us has really to be answered with reference to the scope of "such income", which, though it Is the income of another person, is Included in the assessee's income under the provisions of this Act.
7. We are concerned in this case only with the income chargeable under the head "Fronts and gains of business." It was under that head that the shares of each of the partners and each of the minors admitted to the benefits of the partnership fell during the assessment years In question, it was found by the Tribunal that in the re levant years it was the assessee Marimuthu that was in charge of the general management of the partnership business, It was also never in dispute that in the relevant year the minor song of the assessee did not participate in the conduct of the business of the partnership.
8. The expression "such income" In the concluding clause of Section 2 (6AA), with reference to income chargeable under the head "Profits and gains of business", must obviously refer to the income specified in clause (b) of Section 2(6AA). That one of the tests prescribed by Section 2 (6AA) was that the income must be chargeable under the head "profits and gains of business" was never in dispute. That the business in question was that of the firm, of which the assessee was a partner, and of which he was in general management, was not in dispute either.
In the case of a firm, the test prescribed by Section 2(6AA)(b) is that the assessee should be a partner actively engaged in the conduct of the business. That test the assessee obviously satisfied, because the assessee Marimuthu was a partner of the firm and he was actively engaged in the conduct of the business of the firm.
9. Had Section 2 (6AA) (b) stood by itself, without the concluding portion of Section 2 (6AA), the tests to be satisfied would have been (1) the income must be that of the assessee, (2) that the income should be chargeable to tax under the head profits & gains of business, and (3) in the case of those profits and gains of business having been earned by a firm, the assessee should be a partner actively engageo" in the conduct of the business.
10. Obviously, the first of these tests cannot be satisfied, where the income of another person is included in the income of the assessee for purposes of computation of the assessee's total income or of its assessment to tax. Therefore in construing the scope of the expression "such income" in the concluding portion of Section 2(6AA) the fact that the ownership of income vested in a person other than the assessee becomes Irrelevant. The statute itself makes it so. But the other two tests will have to be satisfied before it can be treated as "such income" within the meaning of the last clause of Section 2 (6AA).
11. The second of the tests was satisfied In this case even with reference to the share of the Firm's profits which accrued to Bhaskara and Rajasekhara. We have already pointed out that that was income which was chargeable to tax under the head profits and gains of business.
12. What is the scope of the third of the tests we have mentioned above is therefore the question to be answered. In our opinion the answer should be, that on a plain reading of the statutory provisions of Section 2(6AA) it is the assessee that should have been actively engaged in the conduct of the business of the firm, of which he as well as the minors, Bhaskara and Rajasekhara were partners, whatever be the basis of the computation of the assessable income of the assessee Marimuthu. Marimuthu satisfied that tests.
13. In the absence of any reported case, where the question at issue before us was decided, the learned counsel referred to the views of commentators on the Indian incometax Act as part of their respective arguments.
14. The learned counsel for the assessee referred to the views of the authors, Kanga and Palkhivala, in their book on Incometax Act 3rd Edn. at pages 2034:
"Under the last para of this definition, Income which is earned by the assessee and included In his total income under the provisions of this Act is his earned income though it may accrue In law to another person. Thus where an assessee's wife is a partner, or his minor child is admitted to the benefits of the partnership, in a firm of which the assessee is a partner, the wife's or child's share of profits is included in the assessee's total income under Section 16(3) and it would be regarded as the assessee's earned income if he is actively engaged In the conduct of the partnership business."
15. The learned counsel for the respondent pointed out that In Sampath Aiyangar's Indian Incometax Act. Vol. 2, 4th Edn page120, the learned author observed:
"...... On the language of clause (c) under discussion which runs, 'and includes any such income which though it is the income of another person', it would appear that the income of such other person should possess characteristics previously mentioned, one of which is that the income should be derived from personal exertion. Prom this It would follow that if the wife were merely a dormant partner, her share of the partnership profits would not be earned income, though it might be Included in the total income of the husband.
To the argument, for proving the contrary, that if the wife were an active partner, her Income would be earned income without any more mention, the answer is afforded, that since the wife is not an assessee 'quoad' that Income, a specific provision was rendered necessary that if her share of the profit were otherwise earned Income, it should not cease to be such merely because she was not assessed, but her husand was. If the husband were also an active partner, both the shares would be earned income. If the husband were a dormant partner, but the wife were an active partner, the wife's income would be assessed In the husband's hands, but as earned income."
16. To similar effect were the views of Mr. V. S. Sundaram expressed in his law of Incometax in India, 7th Edn. at page 126.
17. In our opinion, of the two views set out above, that taken by the learned authors, Kanga and Palkhivala, would appear to be correct. Earned income relief can be claimed only by the assessee. whose income, his own as well as that which Is deemed to be his by any legal Action, is assessed to tax. Sections 16(1)(c), 16(3), 23A and 44D are instances of such legal fictions.
They would all be cases of income of another person included in the assessee's income within the meaning of the last clause of Section 2 (6AA) of the Act. Since it is only the assessee that can claim earned income relief, "such income", as that expression has been used in 8. 2(6AA), must be the Income only of the assessee, though It has to be viewed as his Income only by recourse to one op the other of the legal Actions enacted by the Act. The expression "such Income" has, in our opinion, to be construed as income on which the assessee has to be assessed to tax. That may, as in the case of the assessee before us, Marimuthu, inclued the income of any other person. But since it is not the other person who can be granted relief of earned income, Section 2 (6AA) does not, in our opinion, require that the other person, whose income is included in the income of the assessee, should either by himself or in conjunction with the assessee satisfy each of the three tests we have listed above as those imposed by Section 2(6AA). In the construction of the statutory language of 8, 2(6AA), . equitable considerations can play no part.
If the wife or minor child, whose income is treated as the assessee's and taxed as such, does not participate in the conduct or management of the business of the firm, nonetheless, if the assessee participated In the management or conduct of the business of the firm, the assessee would be entitled to earned income relief. Per contra, if the assessee himself did not participate In the conduct or management of the business of the firm, the fact, that the wife or the minor son participated In such management and conduct, could be a relevant factor, even on equitable considerations, in deciding whether the assessee is entitled to earned income relief on the share, which in law accrued to and vested in the wife or the minor children.
18. These considerations apart. It appears to us that the language of Section 44p (which is one of the classes of cases where the income of one person is deemed to be the Income of another) precludes the construction that the activity posited in the case of income falling within the "Inclusive" portion of the definition in Section 2 (6AA) is that of some person other than the assessee. Subsections 1 and 2 of Section 44D which are relevant In the present context run:
"44D, (1) Where any person has by means of a transfer of assets, by virtue or in consequence whereof, either alone or in conjunction with associated operations, any Income which if it were the income of such person would be chargeable to Incometax becomes payable to a person not resident or to a person resident but not ordinarily resident in the taxable territories, acquired any rights by virtue or in consequence of which he has within the meaning of this section power to enjoy such income, whether forthwith or in the future, that income shall, whether it would or would not have been chargeable to Incometax apart from the provisions of this section, be deemed to be income of such firstmentioned peison for all the purposes of this Act.
(2) Where any person receives or is entitled to receive, whether before or after any transfer of assets by virtue or in consequence whereof either alone or in conjunction with associated operations any income becomes payable to a person not resident or resident but not ordinarily resident in the taxable territories, any sum paid or payable by way of a loan or repayment of a loan or any other sum, being a sum which Is not paid or payable for full consideration In money or money's worth, paid or payable otherwise than as Income, such income shall, whether It would or would not have been chargeable to incometax apart from the provisions of this section be deemed to be the income of the firstmentioned person for all the purposes of this Act."
The "deeming" Is for all the purposes of the Act which In effect effaces the personality of the person actually in receipt of the Income. In such a situation, It would be Impossible to hold that the activity of "the secondmentioned person" wasconsidered as the criterion for the Judging of the eligibility of the "firstmentioned person" to earned Income relief.
19. In our opinion, all that Marimuthu had to satisfy with reference to the third of the tests We have mentioned above was that he was actively engaged in the conduct of the business of the firm of which he was a partner. That test he satisfied. His claim that earned income relief should be granted not only on the basis of his share of the firm's profits but also on the shares of his minor sons, which were included in his assessable income under the provisions of Section 16(3) (a) (II) of the Act, was well founded.
20. Our answer to the consolidated question referred to us is in the affirmative and in favour of the assessee. The assessee will be entitled to the costs of this reference. Counsel's fee Rs. 250.