1971 (1) TMI 32 - HC - Income Tax

Business was settled on trust - one of the beneficiaries was carrying on the business - whether receipts in the hands of beneficiaries are to be treated as earned income or not

Summary

Issues Involved:
1. Whether the receipts in the hands of the beneficiaries are to be treated as earned income.
2. Whether the income falls under section 10 or section 12 of the Indian Income-tax Act, 1922.
3. Whether the assessee is entitled to any earned income relief on the share of income received from the business as a beneficiary.

Issue-wise Detailed Analysis:

1. Whether the receipts in the hands of the beneficiaries are to be treated as earned income:

The central question was whether the income received by the two beneficiaries, Abdul Hameed and Abdul Shakoor, from the bidi business under the wakf deed could be classified as earned income. The Income-tax Officer and the Appellate Assistant Commissioner both held that the sums did not represent earned income. The Tribunal, while dismissing the appeals, agreed with this view.

2. Whether the income falls under section 10 or section 12 of the Indian Income-tax Act, 1922:

The court examined whether the income should be classified under section 10 (profits and gains of business) or section 12 (income from other sources). The Appellate Assistant Commissioner had concluded that the source of income was the right under the deed of wakf and not business income. This was supported by the Accountant Member who discussed the necessity of determining whether the case fell under section 10 or section 12. The court concluded that the income in question falls under section 12 and not section 10, as the source of the receipts was the deed of wakf, not the business itself.

3. Whether the assessee is entitled to any earned income relief on the share of income received from the business as a beneficiary:

For Abdul Shakoor:
The court found that Abdul Shakoor did not carry on any business and merely received money as a beneficiary. Therefore, his income could not be classified as earned income under sub-clause (b) or (c) of clause (6AA) of section 2 of the Act. The receipts in his hands were not earned income.

For Abdul Hameed:
Abdul Hameed's case was more complex due to his dual role as mutawalli and beneficiary. The court emphasized that the income in question was received by him as a beneficiary, not as a mutawalli. Therefore, the receipts could not be classified as earned income under sub-clause (b) of clause (6AA) of section 2. Furthermore, the court held that the income was not immediately derived from his personal exertion as a beneficiary, thus failing to meet the criteria under sub-clause (c) either.

Separate Judgments:

Chief Justice's Opinion:
The Chief Justice concluded that the income in question falls under section 12 and not section 10. The receipts in the hands of both Abdul Hameed and Abdul Shakoor were not earned income.

H. N. Seth J.'s Opinion:
Justice H. N. Seth disagreed with the Chief Justice, stating that Abdul Hameed, who carried on the business as mutawalli, should be entitled to classify the income as earned income under section 2(6AA)(b). However, he agreed that Abdul Shakoor was not entitled to earned income relief.

Third Judge's Opinion:
The third judge, R. S. Pathak, agreed with the Chief Justice, holding that the income received by the assessee as a beneficiary could not be classified as earned income under either clause (b) or (c) of sub-section (6AA) of section 2. The income was derived from the wakf deed, not from personal exertion or business carried on by the assessee.

Final Judgment:
In view of the third judge's opinion, the court answered the question in the negative, in favor of the Commissioner of Income-tax and against the assessee. The Commissioner was entitled to costs assessed at Rs. 200.