The Commissioner Of Income-Tax, Madras vs S. A. S. Marimuthu Nadar

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeals Nos. 427 and 428 of 1960

Decision Date: 10 August 1961

Coram: M. Hidayatullah, P.B. Gajendragadkar

In this matter the Commissioner of Income‑Tax for Madras was the petitioner and S. A. S. Marimuthu Nadar was the respondent. The case was decided by the Supreme Court of India on 10 August 1961. The judgment was authored by Justice M. Hidayatullah, who sat on the bench together with Justices P. B. Gajendragadkar, Subbarao and K. (although the official record lists the bench as consisting of Justice Hidayatullah, Justice Gajendragadkar, Justice P. B. and Justice Subbarao). The citation for the decision is reported in the 1962 volume of the All India Reporter at page 156 and in the 1962 Supreme Court Reports (Third Series) at page 102. The case is also referenced in later reports such as F 1985 SC 1698 (39).

The dispute arose under the provisions of the Income‑Tax Act, 1922 (Eleventh Amendment). Specifically the parties were concerned with the application of section 2(6AA) and section 16(3)(a)(ii) of that enactment. The respondent had formed a partnership firm together with his two adult sons. In addition, his two minor sons were admitted to the benefits of the partnership to the extent of their respective shares. During the assessment years that were the subject of the proceedings, the income of the minor sons was added to the respondent’s total income in accordance with section 16(3)(a)(ii). The respondent was consequently granted “earned‑income relief” only for the portion of the partnership profit that corresponded to his own individual share.

Nevertheless, the respondent sought additional earned‑income relief under section 2(6AA) on the basis of the profit shares that belonged to his minor sons, which had been included in his total income. The Court examined the purpose of section 2(6AA) and held that its general intention is to provide relief in situations where a minor’s income is aggregated with the father’s income, and the father is liable to tax on the combined amount. The Court further explained that, in the context of a partnership, the father‑partner who actively conducts the business may be entitled to relief for the minor’s share of the profits, because the minor does not take part in the business activities.

The case was presented as two civil appeals, numbered 427 and 428 of 1960, filed against the order dated 28 August 1956 of the Madras High Court in the matter referred to as No. 28 of 1953. The appellants were represented by counsel including the Additional Solicitor General of India, H. N. Sanyal, and other advocates. The respondents were defended by a separate group of counsel. The Supreme Court judgment was delivered by Justice Hidayatullah on 10 August 1961.

The principal question referred to the High Court concerned whether the assessee (the respondent) was entitled to earned‑income relief on the share of income of his two minor sons for the assessment year 1949‑50, and on the share of income of one minor son for the assessment year 1950‑51. Both sets of minor‑son income had been included in the respondent’s total income pursuant to section 16(3)(a)(ii) of the Income‑Tax Act. The Court’s analysis focused on the statutory construction of the relief provisions and the factual context of the partnership arrangement, ultimately deciding that the relief under section 2(6AA) could indeed extend to the minors’ profit shares when the father was the active partner in the business.

In this case, the respondent S A S Marimuthu Nadar managed a Hindu undivided family that comprised himself, two adult sons and two minor sons. On 16 August 1946 the family partitioned and a partnership firm was created. In the partnership, Marimuthu Nadar and his two adult sons each received a four‑sixteenth share, while each of the two minor sons was admitted to the partnership with a two‑sixteenth share. For the assessment year 1949‑50, which corresponded to the previous year ending on 16 August 1948, the partnership allocated to Marimuthu Nadar a profit share of Rs 9,812. The two minor sons received profit shares of Rs 8,124 and Rs 8,381 respectively. The income of the minors was added to Marimuthu Nadar’s total income under section 16(3)(a)(ii) of the Income‑tax Act. However, the tax authorities granted earned‑income relief only in respect of Marimuthu Nadar’s own individual share of the partnership profits. In the following assessment year 1950‑51, the elder of the two minor sons attained majority, leaving only the younger minor son still a minor; consequently only the younger son’s share of the partnership profit was added to Marimuthu Nadar’s total income. In that year Marimuthu Nadar’s share of the partnership profit amounted to Rs 12,344, while the minor son’s share was Rs 10,143. Again, earned‑income relief was allowed solely on the basis of the father’s own share of profit and not on the basis of the minor son’s share that had been included in his total income.

Marimuthu Nadar challenged the assessment before the Appellate Assistant Commissioner and subsequently before the Income‑tax Appellate Tribunal, but both appeals were dismissed. At his request the Tribunal referred the remaining question to the Madras High Court for determination. The High Court answered the question positively, holding that relief could be claimed on the minor’s share that had been included in the father’s total income. Consequently the Commissioner of Income‑tax, Madras, filed an appeal under section 66(a)(2) of the Income‑tax Act. All parties agreed on the quantum of the profits and on the fact that the minors’ shares had been incorporated into the father’s total income. The disputed issue was whether earned‑income relief could be granted to the father for the minors’ shares as well as for his own share, as the High Court had held, or only for his own share, as the tax officials, the Assistant Commissioner and the Tribunal had maintained. Those officials relied on the definition of “earned income” in section 2(6AA), contending that relief was permissible only for income that had been earned by the person before it was added to another’s total income, and that in an unregistered firm a minor or a wife must have been actively engaged in the business for relief to apply. The High Court, however, observed that the profits were earned by Marimuthu Nadar in his capacity as a partner actively engaged in the conduct of the business, and therefore the definition supported the inclusion of the minors’ shares in the amount on which earned‑income relief could be claimed.

In this case the Court observed that the appellant was actively engaged in the conduct of the partnership business and that the share of the profits belonging to the minor children had been incorporated in his total income. The Court held that, on the basis of the statutory definition, the inclusion of the minors’ share was proper and that earned‑income relief could be claimed on the amount that comprised both the appellant’s own share and the minors’ share. For the purpose of this analysis the Court reproduced the relevant portion of Section 2(6AA), omitting portions that were not pertinent. The provision reads: “earned income” means any income of an assessee who is an individual,…unregistered firm… (b) which is chargeable under the head ‘Profits and gains of business, profession or vocation’ where the business, profession or vocation 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, profession or vocation; … 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 subsection (2) of section 14 or under a notification issued under section 60.”

The Court noted that, despite the obscurity of the language, the general intention of the section is clear: it is meant to grant an assessee earned‑income relief for income of another person that has been included in the assessee’s total income under the Act. The difficulty, the Court said, lies in determining the conditions that must be satisfied for such relief to be available. The wording of the last paragraph, “and includes any such income,” raises the question of what “such” refers to. Three possible readings of the provision were examined at the hearing. One reading, which had to be rejected as untenable, would extend the reference of “such” back to the opening words “any income of an assessee.” The Court explained that adopting this extended interpretation would render the provision nonsensical. The remaining two readings, advocated by the opposing parties, were considered. Both parties agreed that the income eligible for earned‑income relief must possess the character of “earned income” as defined in the first part of the subsection. The Court then framed the pivotal question: who must actually earn the income? Specifically, in an unregistered firm, is it a prerequisite that the minor or the wife be actively engaged in the conduct of the business, or is it sufficient that the father or husband be so engaged? The Court concluded that the phrase “such income” refers not to the earlier phrase “any income of an assessee” but to the entire definition of “earned income” set out in the Act, before the clause that specifies what is to be included therein.

In this case the Court explained that the expression “such income” meant earned income that had to be measured in the same way as the income described in the earlier part of the definition. The definition required that earned income could arise only when (a) the assessee was either an individual or an unregistered partnership firm, and (b) where the income was chargeable under the head “Profits and gains of business”, the business had to be carried on by the assessee himself if the assessee was an individual, or by a partner who was actively engaged in the conduct of the business if the assessee was a firm. The emphasis therefore lay on the assessee himself conducting the business or, in the case of a partnership, being an active partner. The Court observed that Marimuthu Nadar satisfied both of these conditions with respect to his own share of the partnership profits. The remaining issue for the Court was whether the same conditions were satisfied with respect to the share of profits that belonged to the minor children for the two assessment years in question.

The Revenue argued that the phrase “such income” meant earned income that must be earned by the person who first received it, and not merely by the person in whose total income the amount was later aggregated under the Act. In other words, the Revenue contended that to obtain the earned‑income relief, the minor or the wife had to earn the income actively before it could be pooled into the father’s or husband’s total income and qualify for the relief. The opposite contention, raised by the taxpayer, was that the relief should be available whenever the father or husband worked actively as a partner in the business, even if the income originally belonged to the minor child or the wife. The Court noted that the position with regard to a minor was clear, because a minor could not be a partner who was actively engaged in the conduct of the business; consequently the provision could not be intended to apply to a minor unless the minor himself was actively engaged as a partner, which is impossible. The Court found that the situation involving a wife was more complicated. A wife might herself be actively engaged in the business while the husband remained dormant, or vice‑versa. Under the taxpayer’s interpretation, if the wife alone earned the income and the husband was not actively engaged, the husband could not claim the relief; under the Revenue’s interpretation, the husband could still claim the relief because the income, though initially the wife’s, was ultimately included in his total income. Conversely, if the husband alone was active and the wife was dormant, the taxpayer’s view allowed the husband to claim the relief, while the Revenue’s view denied it. The Court recognized that the general purpose of the provision was to grant relief in cases where the income of a minor child or a wife was aggregated into the husband’s total income for tax purposes.

In this case, the Court noted that it was rare to find minors who were actively engaged in running a business, while it was very common to encounter fathers or husbands who actively conducted the business and whose minor children or wives, as the circumstance required, remained inactive. The Court emphasized that legislation is intended to address the ordinary and frequent situations that arise in daily life rather than the exceptional cases that occur only occasionally. It further observed that, if equitable considerations are permissible within a taxation statute, it is just to grant earned‑income relief to a taxpayer who must pay tax on income that legally belongs to another person but which the taxpayer himself has actually earned. The Court explained that the provision at issue should therefore be read to mean that, for the purpose of earned‑income relief, the expression “such income” includes any income that, although belonging to a different individual, has been earned by the assessee, or, in the context of a partnership, has been earned by the assessee by being actively engaged as a partner in the business. The wording “where the assessee is a partner” must be given effect even when the income of a minor child or a wife falls under the later clause of the definition, and this wording leads to the same conclusion. By interpreting the definition in this manner, the Court held that no distortion of the language occurs. Consequently, the requirement that the assessee must have worked actively as a partner applies equally to the latter part of the definition. The Court agreed with the High Court’s answer and concluded that the appeals were unsuccessful. Accordingly, the appeals were dismissed and costs were awarded.