1980 (4) TMI 34 - HC - Income Tax

Summary

Issues Involved:
1. Classification of dividend income as earned or unearned income.
2. Interpretation of "earned income" under Section 2(7)(iii)(c) of the Finance (No. 2) Act, 1962.
3. Applicability of Section 67(2) of the Income-tax Act, 1961.
4. Relevance of previous case laws and foreign judgments.

Issue-Wise Detailed Analysis:

1. Classification of Dividend Income as Earned or Unearned Income:
The primary issue was whether the dividend income of the assessee, a partner in a firm engaged in the purchase and sale of shares, should be treated as earned income. The Income Tax Officer (ITO) assessed the dividend income under the head "Other sources" and treated it as unearned income. The Tribunal, however, held that the dividend income received by the assessee on shares held as stock-in-trade was earned income, though assessable as income from other sources.

2. Interpretation of "Earned Income" under Section 2(7)(iii)(c) of the Finance (No. 2) Act, 1962:
The definition of "earned income" in Section 2(7)(iii)(c) requires that the income must be immediately derived from personal exertion. The court rejected the contention that the business activity of purchasing and selling shares gives rise to dividend income. It was held that dividend income is derived from the ownership of shares and not from personal exertion. Therefore, the dividend income could not be classified as earned income.

3. Applicability of Section 67(2) of the Income-tax Act, 1961:
Section 67(2) of the Income-tax Act, 1961, mandates that the share of a partner in the income of the firm must be apportioned under the various heads of income in the same manner as the income of the firm. This provision was not present in the Indian Income-tax Act, 1922. The court noted that under the 1961 Act, the share of a partner's income must be assessed under the same head as the firm's income. Consequently, the dividend income must be assessed under the head "Other sources," and not as business income, thus not qualifying as earned income.

4. Relevance of Previous Case Laws and Foreign Judgments:
The court examined several previous judgments and foreign case laws. In CIT v. Narandas & Sons, the share income of a partner from a firm dealing in government securities was considered business income, entitling the partner to earned income relief. However, the court distinguished this case by noting the absence of a provision similar to Section 67(2) in the 1922 Act. The court also referenced the Privy Council decision in Australian Mutual Provident Society v. IRC and the Court of Appeal decision in White (Inspector of Taxes) v. Franklin, but found them not applicable to the present case. The court emphasized that the test for earned income under Section 2(7)(iii)(c) is whether the income is immediately derived from personal exertion, which was not satisfied in this case.

Conclusion:
The court concluded that the dividend income earned by the assessee could not be classified as earned income under Section 2(7)(iii)(c) of the Finance (No. 2) Act, 1962. The question referred was answered in the negative and in favor of the revenue, with the assessee being liable for the costs of the reference.