1980 (4) TMI 41 - HC - Income Tax

Dividend income from shares as stock-in-trade not earned income under Finance Act

The court held that the dividend income received by the assessee on shares held as stock-in-trade did not qualify as earned income under the Finance Act. ... Earned Income Issues Involved:1. Whether the dividend received by the assessee on the shares held by him as stock-in-trade of his share business was earned income.Issue-Wise Detailed Analysis:1. Definition of 'Earned Income':The core issue revolves around the interpretation of 'earned income' as defined in Section 2(7) of the Finance Act. Specifically, the question is whether the dividend received by the assessee on shares held as stock-in-trade qualifies as earned income.2. Assessee's Business Activity:The assessee, a broker and dealer in shares, conducted a regular business of purchasing and selling shares during the relevant assessment years (1963-64, 1964-65, and 1965-66). The assessee received dividends during the course of his business, which he refunded to the purchasers when he could not deliver the shares before the transfer books of the company were closed for dividend declaration.3. Assessing Officer's Treatment:The Income Tax Officer (ITO) initially included the gross dividends received by the assessee as income under the head 'Other sources' and treated the dividend income as unearned income. However, upon rectification, the ITO classified the dividend incomes as earned income.4. Commissioner's Revisional Jurisdiction:The Commissioner of Income-tax, Bombay, exercised his revisional jurisdiction under Section 263 of the I.T. Act, 1961, and modified the assessment orders by treating and assessing the dividend as unearned income.5. Tribunal's Decision:The assessee challenged the Commissioner's action through three separate appeals. The Tribunal had a split opinion:- Judicial Member's View: The dividend income was received as an accretion to the stock-in-trade, requiring effort, exertion, and application of mind, making it indistinguishable from the rest of the income from the share business.- Accountant Member's View: Dividend income is generated by mere ownership of shares, irrespective of whether they are held as stock-in-trade or investment, and does not require any activity on the part of the shareholder.The President of the Tribunal sided with the Judicial Member, stating that the proximate source of the income was the personal exertion in timing the purchase, choice of shares, and judgment exercised by the assessee.6. Revenue's Argument:The revenue contended that the dividend income accrued effortlessly and automatically due to the ownership of shares, and thus, could not be considered as earned income derived from personal exertion.7. Definition in Finance Act:The definition of earned income in Section 2(7)(iii) of the Finance (No. 2) Act, 1962, was scrutinized. It specifies that income chargeable under the head 'Income from other sources' qualifies as earned income only if it is immediately derived from personal exertion.8. Court's Analysis:The court examined the nature of the dividend income in the context of the assessee's business. It was acknowledged that while the dividend income arises in the course of business, for tax purposes, it falls under 'Income from other sources'. The court emphasized the need to determine whether the dividend income was immediately derived from personal exertion.9. Judicial Precedents:The court referred to several precedents, including:- Western States Trading Co. P. Ltd. v. CIT: Dividends on shares held as trading assets form part of business income.- CIT v. Chugandas & Co.: Business income is broken up under different heads for computation purposes but remains business income.10. Conclusion:The court concluded that the dividend income, though arising in the course of business, was not immediately derived from personal exertion but from the ownership of shares. Therefore, it did not qualify as earned income under the Finance Act.Judgment:The question was answered in the negative and in favor of the revenue. The assessee was ordered to pay the costs of the reference.