Earned income relief under S. 2(6AA) of the Income-tax Act can be claimed by an assessee in respect of the share of profits of his minor sons included in his total income, as long as the assessee himself is actively engaged as a partner in the conduct of the business.

Judgment

HIDAYATULLAH, J. : These are two appeals against the judgment of the Madras High Court dated August 28, 1956, by which a composite question embracing two assessment years, referred by the Income-tax Appellate Tribunal (Madras Bench, B ) was answered against the Department. The question, which was referred to the High Court was as follows :

"Whether the assessee is entitled to earned income relief on the share income of the two minor sons for 1949-50 assessment year and on the share income of one minor son for 1950-51 assessment year included in the computation of the total income of assessee under the provisions of S. 16(3)(a)(ii) of the Income-tax Act ?"

2. The respondent, S. A. S. Marimuthu Nadar, was the manager of a Hindu undivided family. The family consisted of Marimuthu Nadar, his two major sons and two minor sons. On August 16, 1946, the family divided, and a firm came into existence. Marimuthu Nadar and his two major sons took 4/16th share each and the two minor sons were admitted to the benefits of partnership to the extent of 2/16th share each. For the assessment year, 1949-50 (the previous year ended on August 16, 1948) the share of profits of Marimuthu Nadar from the partnership was Rs. 9,812, while the share of profits of his two minor sons was Rs. 8,124 and Rs. 8,381. The income of the minors was added to the total income of Marimuthu Nadar under S. 16(3)(a)(ii) of the Income-tax Act. Marimuthu Nadar was granted earned income relief only to the extent of his own individual share of the profits from the partnership. In the assessment year, 1950-51, the elder of the two minor sons had become major, and it was only the share of the remaining minor son which was included in the total income of Marimuthu Nadar. In that year also, he was given earned income relief only on his share of the profits but not on the share of the profits of the minor son, which was included in his total income. Marimuthu Nadar s share of profits was Rs. 12,344 and that of his minor son, Rs. 10,143.

3. Marimuthu Nadar appealed to the Appellate Assistant Commissioner and also to the Appellate Tribunal; but his appeals were unsuccessful. At the instance of Marimuthu Nadar, the Tribunal referred the above question to the High Court for its decision. The High Court answered the question in the affirmative and in favour of the assessee. The Commissioner of Income-tax, Madras, has, therefore, appealed with a certificate under S. 66A(2) of the Indian Income-tax Act.

4. There is no dispute about the amounts involved, nor about the inclusion of the share of the profits of the minors from the partnership, in the total income of the father. The contention, however, is that earned income relief can only be granted to the father in respect of his own individual share of profits and not in respect of the share of the minor or minors, as held by the High Court. The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal held that in view of the definition of "earned income" in S. 2(6AA), only that portion of income was entitled to this relief which satisfied the condition that it was earned by the person to whom it belonged before its inclusion in the total income of another, and that in the case of an unregistered firm, the minor or the wife, as the case may be, must, as a partner, have been actively engaged in the conduct of the business before earned income relief would be admissible. The High Court held that inasmuch as the profits were earned by Marimuthu Nadar working as a partner actively engaged in the conduct of the business and the share of the minors was included in his total income, the definition justified the inclusion of the minors share in the amount, on which earned income relief could be claimed.

5. Section 2(6AA), omitting portions not relevant, reads as follows :

"earned income" means any income of an assessee who is an individual,... unregistered firm. . .

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(b) which is char