TMI Blog1972 (7) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... er alia, an income of Rs. 78,454 and Rs. 3,061 being his share respectively in the profits of the said two firms. The assessee claimed in the course of the assessment-proceedings that the income was "earned income " because during the relevant period he was actively engaged as a partner in the conduct of the business of the firms. The Income-tax Officer negatived the claim of the assessee on the ground that since the assessee had gone to the U. S. A. for prosecuting further studies in January, 1961, and was away from India for a period of about nine months during the relevant accounting year, the assessee could not be said to have been actively engaged as a partner in the conduct of the business of the firms. The Income-tax Officer accordingly treated the said income as unearned income and brought it to tax on that basis. The assessee carried the matter in appeal to the Appellate Assistant Commissioner who confirmed the order of the Income-tax Officer and dismissed the appeal. The Appellate Assistant Commissioner was of the view that during the relevant accounting year, even for the broken period of about three months prior to his departure for the U. S. A., the assessee could no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, in the facts and circumstances of the case, although the assessee was not in India for a period of nearly nine months during the relevant accounting period, it could still be said that the assessee was actually engaged in the conduct of the business of the firm. The Tribunal accordingly allowed the appeal and directed that the business income of the assessee should be taxed as earned income in the assessment year in question. The revenue was obviously aggrieved by the decision of the Tribunal and at the instance of the Commissioner of Income-tax, the Tribunal has referred the following question to this court under section 256 of the Income-tax Act, 1961 : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee's income was earned income within the meaning of section 2(7)(iii)(b) of the Finance (No. 2) Act, 1962 ? " Now, in order to ascertain the true answer to the question posed to us, we will have to construe the relevant words of section 2 of the Finance (No. 2) Act, 1962, which read with the First Schedule thereof prescribed the rates of income-tax and super-tax chargeable for the assessment year commencing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s able to show, therefore, that for the whole of the relevant previous year he was continuously and in an active manner occupied or busy with the work of carrying on or transacting the business of the firm, the business income earned by him as a partner would not qualify for the earned income relief. Mr. Kaji, learned counsel for the assessee, contended on the other hand that the words now under consideration require to be construed broadly having regard to the context in which they are used. He urged, that it is not unknown that in a partnership there are partners who, in popular parlance.. are called " sleeping partners " and who are brought into the firm either because of their financial contribution or family ties or the like. A sleeping partner, though really not engaged in the conduct of the business of the firm, would nevertheless be considered as having been so engaged in the eye of law because of the principle of mutual agency involved in partnership and his share in the profits of the firm would, therefore, qualify for the earned income relief in his hands. The word " actively ", which is prefixed to, the expression " engaged in the conduct of the business ", is used p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roader sense, however, it is also capable of connoting contribution to the business by carrying out some assignment or undertaking, some activity unconnected with the day-to-day management of the business, which might ultimately lead to the preservation and development of the business. It would thus appear that on a plain meaning of the words comprised in the relevant phrase, both constructions- the narrower as well as the broader---for which the parties have contended are possible. We would, in these circumstances, naturally prefer that construction which favours the assessee. But apart from that consideration, there are other weightier considerations which persuade us to accept the construction for, which the assessee contends and we shall briefly notice them. Section 2(7)(iii)(b) deals with two classes of assessees-proprietors of firms and partners of firms-and prescribes different sets of conditions on the satisfaction of which business income derived by assessees belonging to each of the two classes can be treated as earned income. While dealing with the business income of a proprietor of a firm, the legislature speaks of the income derived from " business ...... carried on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of the firm or who does not even otherwise manage the business of the firm may yet be said to be engaged in the conduct of the business of the firm by engaging himself in some course of action which would lead to the stability and growth of the business of the firm. Take, for illustration, the case of a partner of a manufacturing firm who goes abroad for visiting factories which manufacture and market articles similar to those produced by his firm with a view to getting acquainted with the latest technological advancement in the process of manufacture of modern techniques and in the marketing of the products. The partner buys nothing and sells nothing on behalf of the firm and he may be absent for quite a long time so as not to be able to participate in the direction or regulation of the business of the firm. Could it, however, be said that such a partner is not engaged in the conduct of the business of the firm ? It would be possible to answer the question in the affirmative only by unduly restricting the meaning and connotation of the expression " engaged in the conduct of the business ". Such constricted construction would exclude any activities necessary or designed for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it was not until April 16, 1945, that Schuler became a 'person engaged' in the whole-time employment of the plaintiffs, however obvious it maybe that the plaintiffs had 'engaged' him long before that date. " Morton L.J., who delivered a concurring judgment in that case, brought out succinctly the distinction between the expressions " engaged in " and " engaged for" in the following words : " It seems to me that from February to April, 1945, Schuler had been engaged for whole-time employment in the future by the plaintiff-company but was engaged in the whole-time employment of other persons." (emphasis by underlining supplied here to indicate words printed in italics in the report). The Court of Appeal, however, dismissed the appeal because in its opinion the material date for the purpose of the decision of the case was May 2, 1945, when the case was heard by the county court judge and Schuler had actually commenced work before that date on April, 16, 1945. The facts in the latter case (Fuggle's case ) were that proceedings for possession of a dwelling house in possession of their ex-employees were begun by the plaintiffs on the ground that it was reasonably required by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t page 246 of the report) : " For my part, I do not think that the observations of MacKinnon L.J. and Morton L.J., lead to any such view of the construction of the material terms of para. (g). In any case, in my judgment, this servant, Wilson, was, according to the ordinary acceptation of the English language, in fact at the material time engaged in the whole-time employment of the plaintiffs. He was at that time under an existing obligation by contract to work whole-time for the plaintiffs, though in fact he was not able to work owing to illness. This however does not, in my judgment, negative the view that he was engaged at that time in the whole-time employment of the plaintiff just as much as he would have been, if he had happened, on the material date, to be away on a day's holiday or on his annual holiday. It seems to me that if one asks the question, say, of a postal worker, whether he is engaged in the whole-time employment of the Crown, the answer cannot be in the negative merely because on the day on which one asks the question the postal worker happens to be ill in bed or away on his holiday. I venture to think that the learned county court judge really misread the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had actively engaged himself in the conduct of the business of the firm within the meaning of section 2(6AA). We find that there is no discussion in this decision as to, the true, meaning of the expression "actively engaged in the conduct of the business " and the decision turns upon the facts of the case which were glaring. This decision is also, therefore, of no assistance to us. From the foregoing discussion it is evident that having regard to the plain meaning as well as to the context and collocation of the words, the expression " actively engaged in the conduct of the business " occurring in section 2(7)(iii)(b) must be given a liberal meaning. The expression does not necessarily signify active and continuous participation in the actual transaction of the day-to-day business of the firm ; it is flexible enough to take in the case of a partner who devotes time, attention and labour to some activity or assignment calculated or designed to lead to the preservation, growth or advancement of the business of the firm. We may now proceed to consider in the light of what we have said above as to whether the assessee in the present case could be said to have been act ..... X X X X Extracts X X X X X X X X Extracts X X X X
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