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Issues: Whether the partner's share of the firm's income exempted under section 14(2)(aa) of the Indian Income-tax Act, 1922, formed part of the partner's earned income for the purpose of special surcharge under the Finance Act, 1960, or was to be treated as unearned income.
Analysis: The amount in question, though exempt from tax in the partner's hands under section 14(2)(aa), was required to be included in computing total income under section 16(1)(a). The definition of earned income in section 2(6AA) expressly excluded income exempt under section 14(2). Since section 2(6) of the Finance Act, 1960 adopted the same meaning of earned income, the exempt amount could not be treated as earned income for surcharge purposes. The levy of special surcharge under the Finance Act was attracted to the difference between tax on total income and tax on earned income, so the exempt item remained part of total income but outside earned income.
Conclusion: The amount was not earned income and was liable to special surcharge. The reference was answered against the assessee and in favour of the Revenue.
Ratio Decidendi: An amount exempt from tax under section 14(2)(aa) of the Indian Income-tax Act, 1922 may still form part of total income under section 16(1)(a), but it is excluded from earned income by section 2(6AA) and is therefore chargeable to special surcharge under the Finance Act, 1960.
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