COMMISSIONER OF INCOME TAX Vs. GOENKA D G

JUDGEMENT

(1.) THE answer to the question referred in this reference at the instance of the Revenue depends upon the construction of the definition of "earned income" in S. 2(7) of the Finance Act. The question which has been referred is as follows : "Whether, on the facts and in the circumstances of the case, the dividend received by the assessee on the shares held by him as stock in trade of his share business was earned income ?"

(2.) THE assessee is admittedly a broker as well as a dealer in shares and carried on in the relevant asst. yrs. 1963 64, 1964 65 and 1965 66 a regular business of purchasing and selling shares. During the course of his business, he often sold shares cum dividends. At times, when he could not deliver the shares to the purchasers before the transfer books of the company were closed for the declaration of dividend, the assessee would receive and collect the dividend being the registered shareholder of such shares and would pay the dividend to the purchaser by giving credit for the dividend amount towards the price recoverable by him. In the three assessment years in question, the assessee received total dividends of Rs. 1,26,118 and Rs. 69,227 during the course of his share business. Out of these amounts he paid back to the purchasers the dividends received by him on the shares sold by him and the amounts so refunded to the purchasers amounted to Rs. 85,769, Rs. 42,927 and Rs. 46,160, respectively, in the three years under appeal. The ITO deducted these amounts out of the income from brokerage and the income from share business while he included the gross dividends received by the assessee as his income under the head "Other sources". The ITO treated the dividend income as unearned income. However, at the instance of the assessee, the assessment orders were rectified by the ITO and the dividend incomes were classified as earned income.

(3.) THE assessee challenged this action of the CIT by three separate appeals in respect of the three years in question. It was contended on behalf of the assessee before the Tribunal that the share business carried on by the assessee which yielded profit partly in the form of dividend income, required effort, endeavour, exertion, study and application of mind and the dividend income was earned by the assessee as an integral part of his income from the share business and was thus indistinguishable from the rest of the income from the business in shares. According to the assessee, when the rest of the income from share business was treated as earned income, there was no reason for the dividend income to be treated differently though dividend income was separately chargeable under the head "Other sources". According to the Revenue, the dividend income accrued to the assessee effortlessly and automatically by reason of his being the owner of the shares in question and he could not, therefore, be said to have exerted himself for earning the said income.