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PETITIONER: THE COMMISSIONER OF INCOME-TAX,MADRAS

       Vs.

RESPONDENT: S.   A. S. MARIMUTHU NADAR

DATE OF JUDGMENT: 10/08/1961

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. GAJENDRAGADKAR, P.B. SUBBARAO, K.

CITATION:  1962 AIR  156            1962 SCR  (3) 102  CITATOR INFO :  F          1985 SC1698  (39)

ACT: Income  Tax-Earned income relief-If can be granted on  minor son’s  share of profits included in father’s  income-Income- tax Act, 1922 (11 of 1922), ss. 2(6AA), 16(3) (a)(ii).

HEADNOTE: The respondent formed a partnership firm with his two  major sons,  and his two minor sons were admitted to the  benefits of  the partnership to the extent of their shares.   In  the relevant assessment years the income of the minors was added to the total income of the respondent under s. 16(3)(a) (ii) of  the  Income-tax Act and he was  granted  "earned  income relief"  only to the extent of his own individual  share  of the  profits.   He  claimed earned income  relief  under  s. 2(6AA) of the Income-tax Act on the share of the profits  of the minor sons which was included in his total income. Held,  that  the  general intention of s.  2  (6AA)  of  the Income-tax  Act is to give relief in cases where the  income of a minor is included in the total income of the father who has to pay income tax on the consolidated amount of  profits and the section means that in the case of a firm the  father being the partner who is actively engaged in the conduct  of the  business  of the firm while the minor  is  not,  earned income relief should be given to the father to the extent of the minors’ share of the profits also.

JUDGMENT: CIVIL APPELLATE JURISDICTION     Civil Appeals Nos. 427  and 428 of 1960. Appeals  from the judgment and order dated August 28,  1956, of the Madras High Court in case Referred No. 28 of 1953. H.   N. Sanyal Additional Solicitor General of India, K.  N. Rajagopal , Sastri, P. M. Sen and P.    D. Menon, for  the appellants. Narayanaswami and R. Gopalakrishnan, for the respondents. 103 1961 August 10.  The  Judgment of the Court was delivered by

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HIDAYATULLAH, J.-These are two appeals against the  judgment of  the Madras High Court dated August 28, 1956. by which  a composite question embracing two assessment years,  referred by  the Income-tax Appellate Tribunal (Madras Bench,  ’B’  ) was  answered against the Department.  The  question,  which was referred to the High Court, was as follows               "Whether  the assessee, is entitled to  earned               income  relief on the share income of the  two               minor, sons for 1949-50 assessment year and on               the share income of one minor son for  1950-51               assessment year included in the computation of               the   total  income  of  assessee  under   the               provisions  of  section  16(3)(a)(ii)  of  the               Income-tax Act The respondent, S.A.S. Marimuthu Nadar, was the manager of a Hindu  undivided family.  The family consisted of  Marimuthu Nagar, his two major sons and two minor sons.  On August 16, 1946,  the family divided, and a firm came  into  existence. Marimuthu  Nadar  and his two major sons took  4/16th  share each and the two minor sons were admitted to the benefits of partnership  to  the extent of 2/16th share each.   For  the assessment year, 1949-50 (the previous year ended on  August 16, 1948 ) the share of profits of Marimuthu Nadar from  the partnership was Rs. 9,812, while the share of profits of his two  minor sons was Rs. 8,124 and Rs. 8,381.  The income  of the minors was added to the total income of Marimuthu  Nadar under s.16(3)(a)(ii) of the Income-tax Act.  Marimuthu Nadar was  granted earned income relief only to the extent of  his own  individual share of the profits from  the  partnership. In the assessment year, 1950-51, the elder of the two  minor sons had become major, and it was only the share of the 104 remaining  minor son which was included in the total  income of Marimuthu Nadar.  In that year also, he was given  earned income  relief only on his share of the-profits but  not  on the  share  of  the  profits of the  minor  son,  which  wag included  in his total income.  Marimuthu Nadar’s  share  of profits  was  Rs.  12,344 and that of  his  minor  son,  Rs. 10,143. Marimuthu   Nadar  appealed  to  the   Appellate   Assistant Commissioner  and  also to the appellate Tribunal;  but  his appeals  were  unsuccessful.  At the instance  of  Marimuthu Nadar, the Tribunal referred the above question to the  High Court  for  its  decision.   The  High  Court  answered  the question  in the affirmative and in favour of the  assessee. The  Commissioner  of  Income-tax,  Madras,  has  therefore, appealed  with a certificate under s.66(a)(2) of the  Indian Income-tax Act. There  is no dispute about the amounts involved,  nor  about the inclusion of the share of the profits of the minors from the  partnership,  in the total income of the  father.   The contention,  however, is that earned income relief can  only be  granted to the father in respect of his  own  individual share  of  profits and not in respect of the  share  of  the minor or minors, as held by the High Court.  The  Income-tax Officer,  the Appellate Assistant Commissioner and  Tribunal held that in view of the definition of "earned income" in s. 2(6AA),  only  that portion of income was entitled  to  this relief  which satisfied the condition that it was earned  by the  person to whom it belonged before its inclusion in  the total  income  of  another,  and that  in  the  case  of  an unregistered  firm, the minor or the wife, as the  case  may be,  must, as a partner, have been actively engaged  in  the conduct of the business before earned income relief would be admissible.   The  High  Court held  that  inasmuch  as  the

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profits were earned by Marimuthu Nadar working as a  partner actively  engaged  in the conduct of the  business  and  the share of the minors was included 105 in his total income, the definition justified the  inclusion of  the minors’ share in the amount, on which earned  income relief could be claimed.               Section  2(6AA), omitting portions  not  rele-               vant, reads as follows:               "earned income" means any income of an assesee               who is an individual,...unregistered firm...               x     x x x        x x               (b)   Which  is  chargeable  under  the   head               ’Profits   and  gains of business,  profession               or vocation’ where the business, profession or               vocation is carried on by the assessee or., in               the  case of a firm, where the assessee  is  a               partner actively engaged in the conduct of the               business., profession or vocation ;               x x x x x x               and includes any such income which, though  it               is  the income of another person, is  included               in the assessee’s income under the  provisions               of  this  Act, but does not include  any  such               income   which  is  exempt  from   tax   under               subsection  (2)  of  section  14  or  under  a               notification issued under section 60." The  general intention behind the section, in spite  of  its obscurity,  is fairly clear.  It is to give to an  assessee, earned  income  relief in respect of the income  of  another person, included in his total income under the provisions of this Act.  The only difficulty is about the conditions under which  such relief is to be granted.  The words of the  last paragraph of the section are "and includes any such income", and  the  question is what income is indicated by  the  word "such".   Three readings of the section were  considered  at the  hearing ; but one. of them must be rejected as  clearly not admissible.  That reading is to take "such" back to the words "any income of an assessee" in the opening part of the definition.   It is not necessary to give detailed.  reasons why this reading is not permissible.  It is 106 enough to say that if the latter part of the section is read in this extended form, it makes no sense. The  other  two  readings  were pressed  upon  us  for  our acceptance  respectively  by  the  rival  parties.   It   is admitted by both sides that the quality of the income  which is entitled to earned income relief by virtue of the  latter part of s.2(6AA) must be that of learned income" as  defined in  the first part of the sub-section.  The question is  who must  earn  that  income.,  or,  in  ’other  words,  in   an unregistered  firm,  is it a condition  precedent  that  the minor or the wife must be actively engaged in the conduct of the  business.,  or is it sufficient if the  father  or  the husband is so engaged ? The  words "such income" refer, as we have said, not to  the words  "’any income of an assessee" in the earlier part  but to the whole definition of "earned income" given by the Act, before  it  says  what is to be included in  it.   In  other words,  by "such income" is meant, earned income  determined in the same manner in which that. income is to be determined under  the earlier part of the definition.   The  definition requires  that  "earned income" should be (a) income  of  an assessee   who   is,  inter  alia,  an  individual   or   an unregistered  firm  ;  (b)  if  chargeable  under  the  head

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"Profits  and  gains of business...", the business  must  be carried on by the assessee, if an individual, or in the case of a firm, where the assessee is a partner actively  engaged in  the conduct of the business.  The emphasis is  upon  the assessee  carrying on the business himself or as  an  active partner in the conduct of the business. The  two  conditions were obviously satisfied  by  Marimuthu Nadar  in respect of his own share of the profits  from  the partnership.  The question is whether they are satisfied  in respect of the share of the profits of the minors in the two assessment’  years.   According  to  the  Department,  "such income" must be earned income., and earned by the person who receives it in the first instance and not by the 107 person in whose total income it is included by the Act.   In other  words to get the benefit, the income must  be  earned actively by the minor or the wife, before it can qualify for the  earned income relief in the hands of the father or  the husband, as the case may be.  The case of the other side  is that  so  long  as  the father or  the  husband  has  worked actively  as a partner, the income would be entitled to  the relief, even though it was initially the income of the minor son  or the wife.  In the case of a minor, the  position  is clear, because a minor cannot be a partner actively  engaged in  the conduct, of the business, and it is impossible  that the  section is meant to apply to a minor only when a  minor is  engaged actively in business as a partner.  In the  case of a wife, however, the matter is not so simple, because the wife may be actively engaged in the conduct of the  business with  her  husband or the, husband may be dormant.   If  the wife  is  actively engaged and the husband is  not,  on  the reading suggested by the assesee, earned income relief would not  be  admissible  to  the husband,  but  on  the  reading suggested by the Department, it would be.  If the husband is actively  engaged in the business but the wife is not,  then according  to  the reading suggested by  the  assessee,  the husband  would be entitled to the earned income relief,  but not so, on the reading suggested by the Department. Now, the general intention of the section is to give  relief in cases where the income of the minor child or the wife  is included  in the total income of the husband who has to  pay income-tax  on the consolidated amount.  Cases of wives  and minors  actively engaged in the conduct of a  business  are very  few  indeed,  whereas cases of  fathers  and  husbands actively engaged in the conduct of the business while  their minor  children or wives, as the case may be,  are  dormant, are very numerous and of common and natural occurrence.   It is to be expected that the law is framed not for rare  cases but for cases which one encounters 108 daily in ordinary life.  There is also equity (if  equitable considerations can be taken into account in a taxing Act) in giving  earned income relief to a person who has to pay  tax on income which belongs to another but which he has  himself earned.   In  our opinion, the section can only be  read  as enacting  that for purposes of earned income  relief,  "such income"  will be included which, though it is the income  of another person, has been earned by the assessee, or, in  the case  of  a firm, where the assessee is a  partner,  by  his being  actively  engaged as partner in the  conduct  of  the business. the words "’where the assessee is a partner"  must be given effect to, even when the income of the minor or the wife  is  considered under the latter part,  and  they  also point to the same conclusion.  In reading the definition  in this  way, no violence is done to the language of  it.   The

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condition  that the assessee must have worked actively as  a partner  is thus applicable also to the latter part  of  the definition.  In our opinion, the High Court was right in the answer which it gave. The appeals fail, and are dismissed with costs. Appeals dismissed.