1956 (8) TMI 64 - HC - Income Tax

Summary

Issues Involved:

1. Inclusion of minor sons' income in the assessee's total income under section 16(3)(a)(ii) of the Income-tax Act.
2. Entitlement to earned income relief on the share income of minor sons included in the assessee's total income.

Issue-wise Detailed Analysis:

1. Inclusion of Minor Sons' Income in the Assessee's Total Income:

The assessee, Marimuthu Nadar, formed a partnership with his divided sons on 16th August 1946, including his minor sons Bhaskara and Rajasekhara, admitted to the benefits of the partnership. For the assessment years 1949-50 and 1950-51, the incomes of the minor sons were included in the assessee's total income under section 16(3)(a)(ii) of the Income-tax Act. This inclusion was not disputed, even though the capital contributed on behalf of the minors belonged to them. The ownership of the income vested in the minors, but the tax incidence fell on the assessee.

2. Entitlement to Earned Income Relief on the Share Income of Minor Sons:

The core issue was whether the assessee was entitled to earned income relief on the share income of his minor sons included in his total income. The definition of "earned income" in section 2(6AA) was pivotal. The relevant portion of section 2(6AA) specifies that earned income includes income which, though it is the income of another person, is included in the assessee's income under the Act's provisions.

The Tribunal found that Marimuthu was in charge of the general management of the partnership business, and the minor sons did not participate in the business's conduct. The expression "such income" in section 2(6AA) must refer to income chargeable under "Profits and gains of business," with the assessee actively engaged in the business conduct. Marimuthu satisfied this test as he was a partner actively engaged in the business.

The judgment clarified that if section 2(6AA)(b) stood alone, the tests would be: (1) the income must be the assessee's, (2) chargeable under "Profits and gains of business," and (3) the assessee must be a partner actively engaged in the business. The first test is irrelevant when another person's income is included in the assessee's income. The second test was satisfied as the minors' income was chargeable under "Profits and gains of business." The third test required the assessee to be actively engaged in the business, which Marimuthu was.

The court referenced commentators' views, preferring the interpretation by Kanga and Palkhivala, which supported the assessee's claim. The court concluded that "such income" must be viewed as the assessee's income, including income of another person by legal fiction. The assessee alone can claim earned income relief, even if the income is deemed his by legal fiction.

The statutory language of section 44D reinforced this interpretation, indicating that the activity criterion for earned income relief applies to the assessee, not the person whose income is included in the assessee's income.

Conclusion:

The court ruled in favor of the assessee, stating that Marimuthu satisfied the requirement of being actively engaged in the business. Therefore, he was entitled to earned income relief on the share income of his minor sons included in his assessable income under section 16(3)(a)(ii). The consolidated question was answered affirmatively, and costs were awarded to the assessee.