Commissioner of Income Tax vs K.K. Nathani

G.S. Singhvi, J.—The revenue has made an application u/s 256(2) of the income tax Act, 1961 (''the Act'') with the prayer that the following question of law arises out of the order of the Tribunal and the Tribunal was not justified in refusing to refer the same to this court under section! 256(1):

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the income from the business of the assessee was not un-earned income in the hands of the beneficiaries?

The assessment for the year 1966-67 of the assessee was made in the status of Unregistered Firm (URF) since the application for registration vas not filed.

In view of the order of the Tribunal dated 31-8-1978, wherein it was observed that the tax liability could be raised in the same manner as the assessment could have been made in the case of beneficiaries (erstwhile partners) directly, the IAC (Assessment-I) while giving effect to the order if the Tribunal computed the income in the hands of Duduwala & Co. and worked the tax in the hands of the beneficiaries. The dispute was raised as to whether the income in the hands of the beneficiaries could be said to be un-earned income liable to the additional tax and also interest? The assessing authority held that the income was earned by the point receivers and managers by carrying on business for the benefit of the beneficiaries. These profits have been earned by the person to whom they do not belong and, therefore, the income in the hands of the beneficiaries was treated as un-earned income. The income in respect of the assessment year 1959-60 was considered as earned income and the said order of the appellate authority had become final. The Tribunal proceeded in the earlier proceedings on the plea that the income in the hands of Duduwala & Co. has to be computed as business income, but the tax has to be worked out on the basis of each beneficiary''s share which has to be realised from Duduwala & Co. A consent decree was passed by the Calcutta High Court in the suit No. 690 of 1957 along with suit No. 1122 of 1957 in which it was ordered by the High Court that the official receiver stood discharged and the Court''s order dated 11 -12-1959 for the sale of business and assets of Duduwala & Co. was stayed. Ram Kumar Agrawal and Satya Narain Nathani were appointed as joint receivers and managers of the business and assets of Duduwala & Co. and that business was carried on by the beneficiary and the assessments were ordered to be made because of convenience for making the assessments and realisation of the dues. Considering these facts the appeal was allowed by the Commissioner (Appeals). When the matter was challenged before the Tribunal, it was found that Duduwala & Co. was the partnership firm which was carrying on business of mica having Rameshwar Nathani, Ram Kumar Agrawal & Charity as partners in the ratio of 12 annas, 3 annas and 1 anna, respectively. Rameshwar Nathani expired on 18-1-1957 leaving a widow and four sons and daughters. A suit was filed by the sons of the deceased partner Rameshwar Nathani at Bhilwara, while the other partners filed a suit in the Calcutta High Court for a declaration that the firm be treated as dissolved and for rendition of accounts after the death of Rameshwar Nathani. On 26-6-1957, the Calcutta High Court appointed an official receiver of the firm and directed him to carry on the business of the firm with a view to pay off its liabilities. A compromise was arrived at between the parties which was filed in the Calcutta High Court on 4-6-1960. The compromise was accepted by the High Court and a decree was passed on the basis of the compromise by the Calcutta High Court on 15-9-1960. According to the compromise, the firm Duduwala & Co. was dissolved on and from 18-1-1957, i.e., on the death of Rameshwar Nathani, one of the partners. It was agreed between the parties that they were entitled to the assets of the dissolved firm in five equal shares. One share was to go to Ram Kumar Agrawal and four shares were to go to four sons of the deceased partner Rameshwar Nathani. Ram Kumar Agrawal and Satya Narain Nathani were appointed as joint receivers and the firm Duduwala & Co. was divided in 5 equal blocks and five separate lease deeds were executed by the respective parties with the Government. The dispute was with regard to the period of business carried on by the joint receivers and managers Shri Ram Kumar Agrawal and Satya Narain Nathani for the accounting period relevant to the assessment years 1960-61 to 1966-67. The order of the Commissioner (Appeals) was upheld by the Tribunal and the reference application submitted u/s 256(1) was dismissed on the ground that the matter was covered by the decisions of the Supreme Court in the case of Commissioner of Income Tax, Andhra Pradesh Vs. H.E.H. Mir Osman Ali Khan, and Commissioner of Income Tax, Kerala Vs. P. Krishna Warrier, wherein it was held that though the trustees had no beneficial interest in the income of the business, the income was still income chargeable under the head ''Profits and gains of business, profession or vocation''. In the case of P. Krishna Warier (supra) the Supreme Court held that-

... though the trustees had no beneficial interest in the income of the business, the income was still income chargeable under the head ''Profits and gains of business, profession or vocation''. Being income chargeable under the head ''Profits and gains of business, profession or vocation'' carried on by the trustees, it was earned income in their hands, and to the earned income the special surcharge under the Finance (No. 2) Act of 1957 and the Finance Acts of 1958 to 1961 had no application, (p. 154)

Under the Indian income tax Act, 1922, section 2 (6AA) defined ''earned income'' from 1945. u/s 15A of the said Act exemption was granted to the individual HUF, unregistered firm, and AOP and the said exemption was available in respect of salaries, profits of business, profession and vocation. By the Finance Act, 1957 the relief for earned income was abolished in respect of all earned incomes other than salaries and in 1958 the relief of earned income from salary was also withdrawn. The 1961 Act, has no provision for providing relief of earned income. The Finance Act of 1969 subsequently does not define the term ''earned income'' from assessment year 1969-70.

In the case of Commissioner of Income Tax Vs. Duduwala and Co., this Court held that the assessment is to be made in the status of an AOP. The tax liability had to be to the same extent and in the like manner as it would be leviable upon and recoverable from the persons represented by them. Section 161 (1) of the 1961 Act creates vicarious liability and it is co-extensive with the liability of the persons represented by him. In the case of H.E.H. Mir Osman Ali Bahadur (supra) it was held by the Apex Court that the nature of the income retains the same character whether the assessment is made on the trustees or on the beneficiaries. u/s 160(1)(iii) of the Act in respect of income which a trustee, appointed under a trust declared by a duly executed instrument in writing, whether testamentary or otherwise including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913, receives or is entitled to receive on behalf of or for the benefit of any person, such trustee or trustees have to be treated as representative assessees. The representative assessee is deemed to be the assessee for the purpose of the Act. u/s 161(1) every representative assessee as regards the income in respect of which he is a representative assessee shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially and shall be liable to assessment in his own name in respect of that income, but any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall subject to the other provisions contained in Chapter XV be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. In the case of CIT v. S.A.S. Marimuthu Nadar [1962] 44 ITR 1 (SC) a question arose as to whether for the purpose of earned income relief ''such income'' will be included, which though it is the income of another person has been earned by the assessee or in the case of a firm where the assessee is a partner by his being actively engaged as a partner in the conduct of the business. The profit which was earned by a manager working as a partner actively engaged in the conduct of the business and share of the minor was included in the total income; the definition justifies the inclusion of the minor''s share in the amount on which the earned income relief could be claimed. In the case of Haji Abdul Hameed v. CIT [1985] 156 ITR 230 (SC) where the business was carried on by mutawalli who was also a beneficiary and the assessment was made in respect of the income in the hands of beneficiary directly, it was held that the income received by the beneficiary was not the business income. Interpreting clause (b) of section 2(6AA) of the 1922 Act it was observed that under the said clause it has to be seen whether the profits and gains arose to the assessee directly as a result of the carrying on of the business or as a result of the intervention of a deed of wakf and in the latter case the relief was not permissible. The decision in the case of Haji Abdul Hamid v. CIT [1980] 122 ITR 1000 (All.) was over-ruled. It was further observed that all the mutawallis were agents of the beneficiaries and, therefore, earned income relief was available to them.

In the present case Ram Kumar Agrawal and Satya Narain Nathani were appointed as Joint receivers and managers who had carried on the business of mining of Duduwala & Co. It is not in dispute that the income which was earned by carrying on the business and the business income is considered as earned income of the receivers/managers. In the present case the income has arisen to them because of carrying on of the business. The nature of the income will not be changed if the said managers/receivers were carrying on the business as joint receivers/ managers. The character of the income remains the same. It was only on account of the death of Shri Rameshwar Nathani that his legal representative and other partner Shri Satya Narain Nathani entered into a compromise after filing of the suit and in accordance with the order of the High Court they were appointed as Joint Receivers/Managers. This Court has already held that the assessment has to be in the status of AOP. In the year 1959-60, the income was considered as earned income. The business carried on by the beneficiaries has been treated as business income and the character of the said income, therefore, would be earned income even in the hands of beneficiaries.

The definition of earned income has been given in the different Finance Acts. The relevant definition of the earned income in Finance Act, 1962, section 2(7)(iii) was as under, which is practically the same in other assessment years; thus,

(7) For the purpose of this section, and of the rates of tax imposed thereby -

(iii) the expression ''earned income'' means any income of an assessee who is an individual, Hindu undivided family, unregistered firm or other association of persons or body of individuals, whether incorporated or not, not being a company, a local authority, a registered firm or a firm assessed under clause (b) of section 183 of the said Act-

(a) which is chargeable under the head ''Salaries''; or

(b) which is chargeable under the head ''Profits and gains of business or profession'' whether 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; or

(c) which is chargeable under the head ''Income from other sources'' if it is immediately derived from personal exertion or represents a pension or superannuation or other allowance given to the assessee in respect of the past services of any deceased person; 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 the income tax Act, 1961 (43 of 1961), but does not include any such income on which tax is not payable under clause (iii) or clause (v) of section 86 or clause (i) or clause (ii) of sub-section (1) of section 99 of that Act or which is exempted from tax under a notification issued u/s 60 of the Indian income tax Act, 1922 (11 of 1922), as continued in force by clause (1) of sub-section (2) of section 297 of income tax Act, 1961 (43 of 1961).

From a perusal of the above definition, it is evident that the benefit of earned income relief is available to individual, HUF, Registered Firm or other association of persons or body of individuals. The said benefit is not available to a registered firm. u/s 183 of the 1961 Act, the ITO had the option to make the assessment as registered firm or unregistered firm. In the present case, the option has been exercised for making the assessment as an unregistered firm in the year 1966-67 and, therefore, the assessee is entitled to the benefit of earned income. This section has also contemplated the source of income for which the benefit is available, and, ''profits and gains of business or profession'' having been included therein. Since the source is from business, therefore, it will be deemed to be the earned income. The decision of Haji Abdul Hameed''s case (supra) was in respect of the power which was exercised by the ITO u/s 41 (2) of the 1922 Act and even in that decision a distinction was carved that if the assessment is made u/s 41(1), the position would be different. The provisions similar to section 41(1) are now incorporated u/s 160 in the 1961 Act, and the provisions of section 41(2) are analogous to section 166. Section 183 of the 1961 Act specifically provides the mode for assessment in respect of an unregistered firm. The ITO in this section has also the option to make the assessment treating the said unregistered firm, for the purpose of assessment, as unregistered, and, he may also proceed by treating the same as registered firm. The decision of Haji Abdul Hameed''s case (supra), therefore, has no relevance, as the power in the present case has been exercised by the ITO to treat the firm as unregistered firm.

Consequently, we do not consider it a fit case to direct the Tribunal to refer the question of law arising out of its order in view of the fact that the matter is concluded by the decision of the Apex Court. The reference application is, accordingly, dismissed.