THE COMMISSIONER OF INCOME-TAX, MADRAS versus S. A. S. MARIMUTHU NADAR

HIDAYATULLAH, J.-These are two appeals agail'lst 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 :

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"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 tot'J.l income of assesseo under the provisions of section 16(3)(a)(ii) of the Inoome-ta.x Act?"

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The respondent, S.A.S. Marimuthu Nadar, was the manager of a Hindu undivided family. The family consisted of Marimuthu Nadar, 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/l6th share each and the two minor sons were admitted to the benefits of partnership to the extent of 2/16th share each. For the :issessment 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, whilt> 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.l6(3)(a)(ii) of the Income-tax Act. Marimuthu Nadar w!ts 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 l;?ec9~e major, and i~ was only the spare of tH\I remaining minor son which was included in the total income of llforimuthu Nadar. In tha.t year also, he was given earned income relief only on his share of the profits but not on the share of tho profits of the minor son, which was included in his total income. Marimuthu Nadar's share of profits was Rs. 12,:H4 and that of his minor son, Rs. 10,143.

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Marimuthn Nadar appealed to the Appellate Assistant Commissioner and also to the Appellate Tribunal ; but his appeals were unsuccessful. At the instance of :\farimuthu Na<lar, 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 asscssee. The Commissioner of Incom•,·tax, l\ladras, has therefore, appealed with a certificate under s.66(a)(2) of the Imlian Income-tax Act.

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There is no dispute about the amountll im·olved, nor about the inclusion of the share of the profits of the minorn from the partnership, in tho total income of the father. Tho contention, however, is that earned income relief can only ho granted to the father in respect of his own imlividual share of profits ancl not in respect of the share of tho 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 !'arned by the person to whom it belonged before its inclusion in the total income of anothe~, mu! that in the of au unregistered firm, the minor or the wife, .·~ 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 tho profite were earned by l\Iarimuthu Nada.r working a partner actively engaged in the conduct .of the business and the share of the minors was inqlud!l4 in his total income, the definition justified the inclusion of the minors'. share in the amount, on which earned income relief could be claimed.

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Section 2( 6AA), omitting portions not relevant, reads as follows :

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"earned income" means any income of an assessee who is an individual, ... unregistered firm .... x x x x x x

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(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

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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

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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 wordd "any income of .an assessee" in the opening part of the definition. It is not necessary to give detailed r~.l),so:ns why th.ii Jeadin~ is not permissible. It enough t-0 say that if the latter part of the section is read in this extended form, it makes no sense ..

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The other two readings were pressed upon ns for our acc.,ptance re~pectively by the rival parties. It is admith:d by both sides that tho qua.lit~· of the income which iR entitled to earned income relief by virtue of the latter pa.rt of s.2( 6AA) must be that of "earned income" as dofin · cd in the first pa.rt of the sub-section. The question is, who must earn that income, or, in other words, in an unregistered fim1, 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 husbaml is so engaged ?

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The words "such income" refer, as wo have said, not. to the words "any income of an assessce" in the earlier part but to the• whole definition of ""arned income" given by the Act, before it says what is to be included in it. In other words by

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' . "B'llch income" is meant, earned income 1lctermined in the same manner in which that income is to he determined under the e1irlier part of th11 1lcflnition. The' definition requires that "e11rned income" should be (a) income of an asscssee who is, intn· alia, an individual or an unregistered firm ; (b) if chargeable under the head "profitB and gains of business .. .'', the business must be carried on by the asseRBe11, if a.n inclividual, 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 tho business himself or as an active p1Lrtncr in the conduct of the business.

p. 106

The two conditions were obviously satisfied by llfarimuthu Nadar in respect of hi• own share of the profits from tho partnership. · The question is whether they are satisfied in respect of the share of the profits of tho minors in the two assessmen• years. According to the Department, "such income" must he earned income, and earned by the person who receives it ~ tJie first jnst;mi;~ ancJ. not b;r th~ 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 engagedin 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 m .. tter 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 assessee, 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.

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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 j9 to be expected that the law is framed noffor r1p:·e cases l,>utfor C!lse~ wjµch one encounter§ daily in onli.nary Jifo. There is also equity (if equitable considerat.ions can be taken into aocount in a taxing Act) in giving earned income relief to a person who has to pay tax on income whioh belongs to another but which he has himself earned. In our opinion, the section can only be read u 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, whore the u.ssessee is a partner, by his being actively engaged as part.ncr in the conduct of the business. The wordH "where the assessee is a partner" must be giv<'n dft>ct 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 condition that tho asscssee must have worked actively as a partner is thns applicable also to tho latter part of tho rlefinition. In our opinion, the High Court waa right in the answer which it gave.

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The appeals foil, and are dismissed with costs.

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Appeals di8missed. CHA'NDRAKA.J.'{T KRISHNARAO PRADHAN AND ANOTHER

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v. THE COLLECTOR OF CUSTOMS, BOMBAY

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AND OTHERS (P. B. K.

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:\I. J.C. and

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JJ.)

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Cu~tom tliere<if-1 alidily-Agent'a liability for •hart collection of cu.lama dutie.!-Cmtam Hau•< Agents licensing Rule8, 1960, rr. 4, 6(a), 6(b), 6(c), 8, 9\2) (p), 11, 15 (g), 12, 17, 19, 22 Form• C. D.-Sea Ouslama Act, 1878 (8 of 1878), as amended by Act 21of1955, ss.4, (/), 202-Conalilulia• of Jndit1, Aris. 19 (I)(g) 19 (6).

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The petitioners were working as Dakils at New Qum>~

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