1967 (7) TMI 49 - HC - Income Tax

Whether the assessee was entitled to earned income relief - payments made to the assessee were not chargeable under the head salaries and hence the earned income relief could not be given to the assessee

Issues Involved:
1. Whether the amounts received by the assessee from Alembic Glass Industries Ltd. and Uday Ltd. could be treated as income and liable to income-tax for the assessment years 1955-56 to 1958-59.
2. If the answer to the first issue is affirmative, whether the said amounts could be treated as income from other sources chargeable under section 12 of the Indian Income-tax Act, 1922, or as income chargeable under the head "salaries" under section 7 of the Act.
3. Whether the assessee was entitled to "earned income relief" in respect of the said amounts for any of the four assessment years.

Issue-wise Detailed Analysis:

Issue 1: Treatment of Amounts as Income
The court examined whether the amounts received by the assessee from Alembic Glass Industries Ltd. and Uday Ltd. could be treated as income. The assessee argued that these payments were gratuitous and not for any services rendered, hence should not be considered as income. However, the court referenced the case of H. H. Maharani Shri Vijaykuverba Saheb of Morvi v. Commissioner of Income-tax, where it was established that voluntary and gratuitous payments connected with an office, profession, vocation, or occupation could constitute income if they are referable to a definite source. The court found that the payments received by the assessee were periodic and from definite sources, thus constituting income liable to income-tax.

Issue 2: Classification of Income
The court then addressed whether the amounts should be classified as income from other sources under section 12 or as salaries under section 7 of the Act. The assessee sought the benefit of Notification No. 878-F, which exempts certain classes of income from tax but includes them in the total income for assessment purposes. The court noted that the Notification requires three conditions to be satisfied: the sum must be received on account of salary for services rendered, paid out of the profits of the business, and not allowed as a deduction but included in the profits of the business. The court found that while the sums were paid out of profits and not allowed as deductions, the assessee had not rendered any services to the companies, thus failing the first condition. Consequently, the amounts could not be classified as salaries and were instead chargeable as income from other sources under section 12 of the Act.

Issue 3: Earned Income Relief
Regarding the claim for earned income relief, the court referred to section 2(6AA) of the Act, which defines "earned income" as income chargeable under the head "salaries" or "other sources" if derived from personal exertion. The court found that the assessee had not derived the income from personal exertion, as established by the Tribunal's findings that no services were rendered. The court also rejected the argument that the payments were salaries due to the lack of an employer-employee relationship between the assessee and the companies. Therefore, the assessee was not entitled to earned income relief for the amounts received.

Conclusion:
The court answered the questions as follows:
1. The amounts received by the assessee from Alembic Glass Industries Ltd. and Uday Ltd. could be treated as income and liable to income-tax.
2. The said amounts were chargeable as income from other sources under section 12 of the Act, not as salaries under section 7.
3. The assessee was not entitled to earned income relief in respect of the amounts received from the two companies.

Since the assessee failed on all three questions, she was ordered to pay the costs of the reference to the Commissioner.

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