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TMI Blog1980 (4) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... gistered shareholder of such shares and would pay the dividend to the purchaser by giving credit for the dividend amount towards the price recoverable by him. In the three assessment years in question, the assessee received total dividends of Rs. 1,26,118 and Rs. 69,227 during the course of his share business. Out of these amounts he paid back to the purchasers the dividends received by him on the shares sold by him and the amounts so refunded to the purchasers amounted to Rs. 85,769, Rs. 42,927 and Rs. 46,160, respectively, in the three years under appeal. The ITO deducted these amounts out of the income from brokerage and the income from share business while he included the gross dividends received by the assessee as his income under the head " Other sources ". The ITO treated the dividend income as unearned income. However, at the instance of the the assessment orders were rectified by the. ITO and the dividend incomes were classified as earned income. The Commissioner of Income-tax, Bombay, exercised his revisional jurisdiction under s. 263 of the I.T. Act, 1961, and modified the assessment orders in respect of the three years in question by treating and assessing the divide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares and circumstances in which the shares bought were immaterial. According to the Accountant Member, the mere ownership of shares generated income and no activity on the part of the shareholder is needed to earn the same. The dividend income was, therefore, in his view, unearned income. There being difference of opinion, the question as to whether the dividend received by the assessee on the shares held by him as his stock-in-trade was earned income was referred to the President of the Tribunal. The President of the Tribunal agreed with the view taken by the judicial Member. He observed that the declaration of dividend by a company and the assessee being a registered shareholder is not the immediate source of the dividend income, but it establishes the shareholder's right to get the income and not the source of the income. According to the learned President of the Tribunal, the proximate source of the income was his personal exertion in timing the purchase, in the choice of the shares and in the judgment he exercised as to whether they were to be retained or not and whether by selling ex-dividend, he could recoup the expenses incurred or having the shares registered in his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f sub-section (2) of section 297 of the Income-tax Act, 1961 (43 of 196 1). " We are not, for the purposes of this reference, concerned with the inclusive part of the definition. The definition is in three parts. Under cl. (a) the income of an assessee which is chargeable under the head " Salaries " is statutorily made earned income. Under cl. (b) the income of an assessee which is chargeable under the head " Profits and gains of business or profession " where the business or profession is carried on by the assessee or, in the case of a firm, where the assessee is a partner actively engaged in the conduct of the business or profession, is also statutorily made earned income. However, when we come to the third category in cl. (c) of the definition, before an income which is chargeable under the head " Income from other sources " can qualify for being classified as earned income, it has to satisfy the test laid down in cl. (c) and the test is that the income mast be immediately derived from personal exertion (which would be relevant) in so far as the facts of the present reference are concerned. In other words, the income of the assessee which is chargeable under the head " Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contention that where shares form the stock-in-trade of an assessee, the income is in the nature of business income. Mr. Joshi appearing on behalf of the revenue has, however, contended that it is no doubt true that the shares in respect of which dividend income is received by the assessee were acquired by him as his stock-in-trade, but, according to the learned counsel, having regard to the definition of earned income in s. 2(7)(iii) of the Finance Act, (No. 2) 1962, in the case of income chargeable under the head " Income from other sources ", unless the income can be said to have been derived immediately from the personal exertion of the assessee, it cannot qualify for being classified as earned income. According to the learned connsel, though the acquisition of shares by the assessee may have been the result of personal exertion on his part, the dividend income cannot be said to be a result of any personal exertion. The learned counsel contended that the important words in the section are " immediately derived from " and these words indicate that the direct source of the income must be personal exertion before any income can be classified as earned income. Section 56 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d income has been sought to be built up. Our attention was also invited to the earlier decision of the Supreme Court in CIT v. Chugandas Co. [1965] 55 ITR 17. That was a case in which the assessee-firm was a dealer in securities holding securities as its stock-in-trade. The assessee had received interest on securities in the years 1946 and 1947, respectively, and the firm discontinued its business on 30th of June, 1947. The question was whether the interest on securities formed part of the assessee's business income for the purpose of exemption from tax under s. 25(3) of the Indian I.T. Act, 1922. The Supreme Court holding that the assessee was entitled to exemption under s. 25(3) in respect of interest on securities as well, observed that there was no reason to restrict the condition of the applicability of the exemption under s. 25(3) only to income on which tax was payable under the head " Profits and gains of business, profession or vocation " and that exemption under s. 25(3) was general. Dealing with the limited purpose of classification of income under the different heads under the Indian I.T. Act, 1922, the Supreme Court observed as follows (p. 24): " The heads descri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord, growth prospect and ability and that the study of these and several other details including the economic trends in the country, the economic policy of the Government, the import policy of the Government, etc., necessarily involves personal exertion on the part of the assessee. That, however, does not solve the problem because unless it is possible to hold that the dividend income is immediately derived from the personal exertion referred to above, it will not qualify for being classified as earned income. The word " derive " has several meanings and one of the meanings given in the Oxford English Dictionary is: " To trace or show the derivation, origin, or pedigree of; to trace the origination of (anything) from its source ". Another meaning is "To draw, fetch, get, gain, obtain (a thing from a source) ". The words "immediately derived from " have been advisedly used in the definition in order to indicate that only income of which the direct source is the personal exertion of the assessee can be classified as earned income. The words " derived from " were intended to indicate that the source must be the personal exertion and the word " immediately " which has been used clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om land. After holding that the interest was clearly not rent and that it was not revenue derived from land, the Privy Council indicated the nature of the enquiry which must be made where the word " derived " is used. It was observed by the Privy Council as follows (p. 328): " The word ' derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition. " As indicated by the Privy Council, when the word " derived " is used in the definition, we must enquire into the genealogy of the product. In the instant case, we must go to the genealogy of the dividend. The dividend is derived from the shares. The shares may be acquired by personal exertion. But, as pointed out by the Privy Council, the moment we are able to trace the source of the dividend, we must stop and if this source is not personal exertion as indicated in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only part that the trust fund of Rs. lakh had played in the managing agency business was that it had served as a deposit for the discharge of the obligations of the managing agents and there was no connection whatsoever between the commission earned by the managing agents and the keeping in deposit of the sum of Rs. 1 lakh and it was pointed out that the managing agency commission was derived neither from the sum of Rs. 1 lakh nor from any business which had been started with the assistance of the sum of Rs. 1 lakh. Referring to the decision of the Privy Council in Kamakhya Narain Singh's case [1948] 16 ITR 325, it was observed as follows : " It is true that their Lordships were there considering the question of agricultural income, but the interpretation placed upon the expression 'derived' by their Lordships is not without assistance for interpreting the same expression in section 4(3)(i). The expression used in this section is 'any income derived from property held under trust', and to put upon it the interpretation put by the Privy Council, the Property must be the effective source from which the income arises. It is not sufficient that the property should be indirectly resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly in s. 56(2) in the income from other sources may not affect the basic proposition that in the case of an assessee who deals in shares, income from dividend arises in the course of business and, therefore, may partake of the nature of business income. What is, however, important is that the Division Bench had pointed out that the dividends were received as incidental to the shares held as stock-in-trade. The assessee received the dividend income because he owned the shares and the income from dividend was, therefore, directly derived from the ownership of the shares and not from any personal exertion. Mr. Joshi has brought to our notice a decision in Bucks v. Bowers [1969] 46 TC 267 (Ch D). The appellant-assessee was a partner in a firm of merchant bankers and worked full-time in its business. In the course of the business, the firm held from time to time, and constantly varied, great number of investments, the income of which was taxed by deduction. Such investments included foreign investments, the interest on or dividends from which were charged under Case IV or Case V of Sch. D. The assessee claimed earned income relief for the assessment year 1964-65 in respect, of so much ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s used in the definition of " earned income " are " immediately derived from ", the direct source has to be ascertained and, as further pointed out by him, in the case of dividends, the direct source is the investment. Our attention has also been invited to a later decision under the English Income Tax Act, 1952, reported in Northend (H. M. Inspector of Tans) v. White Leonard and Corbin Greener [1975] 1 WLR 1037; 50 TC 121 (Ch D). That was a case in which a firm of solicitors in which one Mr. Beveridge was the partner paid certain clients' moneys received in the course of their practice into a clients' deposit account at their bank. Under the Solicitors Act, 1965, the solicitors were entitled to keep the interest received thereon although the principal moneys did not belong to the firm of solicitors. The General Commissioners had held that the partner of the firm was entitled to earned income relief on his share of such interest, as being immediately derived from the carrying on or exercise by him of his profession. When at the instance of the revenue a case was stated for the opinion of the High Court, it was held that the partner was not entitled to the relief claimed because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Munim, appearing on behalf of the assessee, has invited our attention to a decision of the Orissa High Court in Ramachandra Mardaraj Deo v. CIT [1955] 27 ITR 667, where the Division Bench was called upon to construe the definition of " earned income " in s. 2(6AA)(c) of the Indian I.T. Act, 1922, which is identical to the definition of earned income in s. 2(7)(iii)(c) of the Finance (No. 2) Act, 1962. The Division Bench in that case has held that the income must be brought into being immediately by the personal exertion of the assessee and not by the exertion of an intermediate agency. The assessee owned zamindari estates and a part of his income consisted income from forestry, interest on arrears of rent, fisheries, royalties received from quarries, etc., which was assessable to income-tax as income from other sources. The assessee claimed that he was entitled to earned income relief in respect of his forest income, but the Appellate Tribunal held that having regard to the position of the assessee and the nature of the source of the income exploited, namely, forest, he could not have exerted himself personally to produce the income and he has necessarily to appoint assistant ..... X X X X Extracts X X X X X X X X Extracts X X X X
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