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Issues Involved:
1. Whether the Income-tax Appellate Tribunal rightly held that no special surcharge could be levied on the assessee's share of tax paid by the registered firm. Detailed Analysis: Background and Facts: The assessment year in question is 1960-61. A registered partnership firm had two partners. The Income Tax Officer (ITO) did not charge a special surcharge on the share of income-tax paid by the firm falling to the share of the assessee. The Commissioner of Income Tax (CIT) initiated action under Section 33B of the Indian Income Tax Act, 1922, treating this as an omission prejudicial to the interest of revenue, and directed the ITO to revise the assessment order to include the special surcharge in accordance with the Finance Act, 1960. Tribunal's Decision: The assessee appealed to the Income-tax Appellate Tribunal, which upheld the assessee's contention that the amount was "earned income" and exempt from tax under Section 14(2)(aa) of the Indian Income Tax Act, 1922. Therefore, no special surcharge was leviable. The CIT then applied for a reference to the High Court under Section 66(1) of the Indian Income Tax Act, 1922. High Court's Analysis: The High Court analyzed the issue by considering the following points: 1. Nature of Income: - The primary controversy was whether the income in question was "earned income" or "unearned income." - The Tribunal's additional statement of the case indicated that the department treated this amount as "earned income," but this was disputed throughout the proceedings. 2. Relevant Provisions of the Indian Income Tax Act, 1922: - Section 2(6AA) defines "earned income" and expressly excludes any income exempt from tax under Section 14(2). - Section 14(2)(aa) exempts a partner's share in the profits of a registered firm from tax. - Section 16(1)(a) includes exempted sums in computing the total income of an assessee. 3. Relevant Provisions of the Finance Act, 1960: - Section 2(6) of the Finance Act, 1960, defines "total income" and "earned income" with reference to the Indian Income Tax Act, 1922. - The First Schedule provides for a special surcharge on the difference between the income-tax on the total income and the income-tax on the earned income. 4. Arguments by Counsel: - The assessee's counsel argued that the firm's expenditure on tax could not be treated as the partner's income, the partners being active implied all income was earned, and special surcharge could not be levied on exempt income. - The revenue's counsel argued that the income exempt under Section 14(2)(aa) was included in the total income but excluded from earned income, thus liable for special surcharge. Court's Conclusion: - The High Court held that the income in question, exempt under Section 14(2)(aa), was part of the total income but not earned income. - The Tribunal's view that the income was earned income was incorrect. - The Division Bench decision in Mohammad Hanif's case (unreported decision in M.C.C. No. 80 of 1969 dated 5-11-1970) was correct. Judgment: The High Court answered the reference in the negative, stating that the Income-tax Appellate Tribunal was wrong in holding that no special surcharge under the Finance Act, 1960, could be levied on the assessee's share of tax paid by the registered firm. The costs of the reference were to be paid by the non-applicant assessee, with counsel's fee set at Rs. 300 if certified.
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