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TMI Blog1972 (7) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 not be said to have been actively engaged in the conduct of the business of the firms because he was then only a student and was engaged in matters connected with the proposed trip to the U. S. A. The assessee carried the matter in further appeal to the Income-tax Appellate Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 on the 1st day of April, 1962. The Act treats earned income on a somewhat lenient basis in certain respects. Sub-section (7) of section 2 defines some of the expressions for the purpose of the said section and of the rates of tax imposed thereby and " earned income " is one of the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 precisely with a view to ensuring that, a partner who participates in the conduct of the business of the firm only through the agency of his co-partners does not get the benefit of the earned income relief. The expression " actively engaged in the conduct of the business ", proceeded the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by the assessee ", whereas while dealing with the business income of a partner of a firm, it speaks of income derived by a " partner actively engaged in the conduct of the business of the firm ". The proprietor of a firm, even if he carries on his business through an agent, cannot remain p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, 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 preservation and expansion of business and since the language employed by the legislature does not compel us to take such a view, there is no reason why we should prefer it. The learned Advocate-General relied upon two English decisions in support of the construction of the words "engaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inctly 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 them for one Wilson, who, according to the arrangement arrived at on July 11, 1947, was to have entered their whole-time employment on September 10, 1947. Before the joining time, Wilson had freed himself from his previous occupation ; however, just three days before September 10, when he was du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ish 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 language which he cited, though it is no doubt true that one sentence particularly in MacKinnon L.J.'s judgment might lead at first sight to the other conclusion." Now it is true that these two decisions deal with the import of the expression " engaged in " but we fail to appreciate how they help the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 actively engaged in the conduct of the business of the firm. The findings of the Tribunal bearing on this question are : (i) that even before the assessee attained the age of majority, on 17th January, 1957, he was admitted to the benefits of partnership as a minor partner, (ii) that for the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X
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