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TMI Blog1977 (12) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... s come before us. It is stated at the bar that with reference to the relevant period the only decision on the point is that of the Division Bench in Mohammad Hanif's case (unreported decision in M.C.C. No. 80 of 1969, dated 5-11-70) the correctness of which has been challenged on behalf of the assessee. The relevant facts are these : The assessment year is 1960-61. A registered partnership firm, M/s. Mohanlal Hargovinddas of Jabalpur, had only two partners, namely, Smt. Jadaobai and Smt. Ujjambai, during the relevant period. The ITO, while assessing the income of Smt. Jadaobai and Smt. Ujjambai for the assessment year 1960-61, had not charged special surcharge amounting to Rs. 32,400 in each case on the share of income- tax paid by the registered firm falling to the share of the assessee. The CIT treating it as an omission prejudicial to the interest of revenue initiated action under s. 33B of the Indian I.T. Act, 1922, and ultimately directed the ITO to revise the order of assessment in the case of each partner by including the special surcharge of Rs. 32,400 in accordance with the Finance Act, 1960 (Act No. 13 of 1960). On behalf of the assessee, it had been contended that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the partner, i.e., whether it was " earned income " as contended by the assessee or " unearned income " as contended by the revenue, which obviously was the only controversy between the parties throughout from its, very inception. The Division Bench thought that no specific finding had been given by the Tribunal on this question even though this income of the partner had been assumed to be the "earned income" and not unearned income. For this reason, the Division Bench also called upon the Tribunal to give its specific finding on the question, i.e, whether this income of the partner was " earned income " or " unearned income ". It was directed that the case was to be listed before a Full Bench after the additional statement of case on this point had been submitted by the Tribunal. This was the order passed by the Division Bench on August 13, 1975. Thereafter, an additional statement of case dated January 31,1976, has been submitted by the Tribunal. It has been stated therein that the department has treated this amount in the hands of the two partners as their " earned income " and there had never been any dispute on this point so that it constituted a part of the "earned income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation of persons not being a company, a local authority, a registered firm or a firm assessed under clause (b) of sub-section (5) of section 23-- ...... and includes any such income which, though it is the income of another person, is included in the assessee's income under the provisions of this Act, but does not include any such income which is exempt from tax under sub-section (2) of section 14 or under a notification issued under section 60 ........" " 14. Exemptions of a general nature.--(1) ...... (2) The tax shall not be payable by an assessee . ...... (aa) if a partner of a registered firm, in respect of that portion of his share in the profits or gains of the firm as is equal to the difference between his share in the total income of the firm and his share in such total income excluding the income-tax, if any, payable by the firm, the share in either case being computed in the manner laid down in clause (b) of sub-section (1) of section 16 :........ " " 16. Exemptions and exclusions in determining the total income.--(1) In computing the total income of an assessee-- (a) any sums exempted under the first proviso to sub-section (1) of section 7, the secon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the special surcharge under the Finance Act, 1960. Shri K. A. Chitale, learned counsel for the assessee, contends that the Division Bench in the above case over simplified the problem to reach that conclusion and according to him that decision is incorrect. While inviting us to take the contrary view, he has advanced the following arguments, namely : (1) For the purpose of s. 14(2)(aa) of the Act, it is a case of tax paid by the firm, i.e., an expenditure incurred by the firm on account of which it cannot be treated as any kind of income of the partner for the obvious reason that the firm's expenditure cannot be the partner's income. (2) Both the partners of the firm being active partners thereof, the total income in their hands must be treated as entirely " earned income so that no part of it could be " unearned income ". (3) Special surcharge can be levied only when there is income-tax payable by the assessee and since this amount being exempt from payment of tax under section 14(2)(aa) of the Act, no tax was payable thereon, the question of levying any special surcharge on it was obviously excluded. In reply, Shri P. S. Khirwadkar, learned counsel for the revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income of the assessee-partner cannot be included within the assessee's " earned income " for purposes of the Act. The Tribunal has taken the view that cl. (aa) was inserted in 1956 in sub-s. (2) of s. 14 of the Act but was not there when this definition in s. 2(6AA) had been inserted so that the definition of " earned income " was not intended to exclude from within its ambit an item exempted from payment of tax later by the insertion of cl. (aa). Incidentally, this difficulty was also felt by the Division Bench deciding Mohammad Hanif's case (unreported decision in M.C.C. No. 80 of 1969 dated 5-11-1970), even though the Division Bench ultimately said that the Legislature's omission did not alter the result. In our opinion, such a difficulty, if any, is also not real. We are actually concerned with the meaning of " earned income " with reference to the Finance Act, 1960, which in s. 2(6) expressly provides that the expression " total income " means total income as determined for the purpose of income-tax, etc., in accordance with the Indian I.T. Act, 1922, and the expression " earned income " has the same meaning assigned to it in s. 2(6AA) of that Act. Thus, the expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce in computation of the " total income s. 16 permits addition of certain items which are admittedly not included within the ambit of earned income as defined in s. 2(6AA). In view of these express provisions in the Act, the argument must be rejected. The last argument is an attempt to knock out the very foundation to levy the special surcharge. If that were correct, nothing more would require consideration. In this context, it would be profitable to quote from, the opinion of Chagla C.J. in CIT v. N. M. Raiji [1949] 17 ITR 180 (Bom), wherein the scheme of the Indian I.T. Act, 1922, was indicated. Admittedly, that view continues to hold the field. The relevant extracts are as follows : " Now, the scheme of the Indian Income-tax Act is that income, profits and gains of an assessee are liable to tax subject to certain exemptions and exceptions. Although certain sums may be exempted from taxation, still they may form part of the total income of an assessee in order to determine the rate at which income-tax is payable. Therefore, it follows that the total income of an assessee is not necessarily wholly subject to tax. Por- tions of it may be exempt from taxation and yet may be com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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