COMMISSIONER OF INCOME TAX Vs. NATWARLAL TRIBHOVANDAS

JUDGEMENT

(1.) THIS reference raises a short but interesting question as to whether the income of the assesses derived from partnership business is earned income or unearned income. The assessee, who was assessed in the capacity of an individual, was a partner in two firms, namely, Messrs. Ramjibhai Hirjibhai and Sons and Messrs. Vishvakarma Construction Co. Both the firms carried on the business of construction work. For the assessment year 1962 -63 (corresponding accounting year being S. Y. 2017, i.e., the period from 21st October, 1960 to 5th November, 1961), the assessee filed a return showing, inter 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.

(2.) 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.

(3.) 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 :