Commissioner of Income Tax vs G. Murugesan and Brothers

Veeraswami, J.—This question turns on the status of the assessee. The reference which comes before us at the instance of the

Commissioner of Income Tax u/s 66(1) of the Income Tax Act, 1922, relates to the assessment years 1957-58 to 1962-63. The question under

reference is:

Whether, on the facts and in the circumstances of the case, the department was justified in assessing the assessee in the status of an ''association

of persons'' ?

On December 4, 1940, Sinnamani Nadar and his son, Ganesan, effected a partition of the family properties and a firm by name A.M.M.

Sinnamani Nadar Firm was started on June 27, 1955. Sinnamani Nadar executed a settlement deed conveying to his four grandsons the life-

interest in a house property, 94, V.E. Road, Tuticorin, and the remainder to their children. Sinnamani Nadar also made a gift of a certain number of

shares in joint stock companies in the name of G. Murugesan and Brothers. The four grandsons, Murugesan, Kathiresan, Raja Shanker and

Vetrivel, attained their age of majority on March 15, 1955, February 3, 1956, September 2, 1961, and December 12, 1962.

The further facts relating to the determination of the question of status are these. Till February 15, 1959, the mother represented the four boys in

realising rent and dividends from the house property as well as the shares and did incidental acts necessary in respect thereof. The income received

under both the heads was credited to the joint account of the four brothers in the grand-father''s firm and, at the end of each year, the same was

credited in equal moieties to their individual accounts in the firm. After February 15, 1959, the eldest brother, Murugesan, started looking after the

realisations of the rent and dividends. On March 15, 1955, the brothers out of the funds available to their credit acquired 250 shares and the

dividends were first received to the credit of the joint account.

On these facts, the revenue took the view that the four brothers, formed an association of persons and should be assessed as such but the

Tribunal differed and held that, at the inception, the acquisition of the house property and the shares by the brothers was involuntary and that the

existing state of affairs continued. The Tribunal thought that there was nothing to show exercise of volition by the brothers to form themselves into

an association of persons.

Section 3 of the Income Tax Act mentions association of persons as one of the categories of persons, who should be assessed on his or their

appropriate status. Though the expression "" association of persons"" is not a term of art and conveys the normal meaning of a combination or

coming together of more than one person, having regard to the context in which the expression occurs, namely, in the Income Tax Act, such

combination has naturally to be viewed to be one for the purpose of making income, profit or gain. Having said that, it seems to us that it is difficult

to define the term ""association of persons "" with more exactitude, for, it is one of those phrases which is better understood than defined. There are

a number of cases decided in the light of particular facts but, in doing so, attempt has been made at some definition or other, but such attempt, as

we see, took colour from the facts of the case which came up for decision.

In Commissioner of Income Tax, Madras Vs. N.V. Shanmugam and Co. and Others, . to which one of us was a party, this court had occasion

to refer to a number of such cases and summed up the result by stating :

It is clear from these decided cases in the context of Section 3 that an '' association of persons '' is a combination of persons for the purpose of

producing income by their joint act or venture in that direction. It is unlike a contract of partnership. An ''association of persons'' need not

necessarily be on the basis of a contract. But when persons combined for such a purpose, it should be assumed that it is a consensual act on their

part and is the result of some understanding between them.

But the difficulty arises more often than not in the application of these tests. Before us, as is to be expected, our attention has been invited at the

Bar to a number of cases. Commissioner of Income Tax, Bombay Vs. Smt. Indira Balkrishna, referred to B. N. ELIAS AND OTHERS, IN RE.,

. COMMISSIONER OF Income Tax, BOMBAY Vs. LAXMIDAS DEVIDAS AND ANOTHER., and In re Dwarakanath Harischandra Pitale,

[1937] 5 ITR 716. 721, and observed that these decisions correctly laid down the crucial test for determining what an association of persons

within the meaning of Section 3 was. On facts it was a case of three widows owning property in common and deriving income therefrom. There

was a finding that they had not exercised their right to separte enjoyment and, except for receiving dividends and interest jointly, they had done no

act which had helped to produce income in respect of the shares and deposits. On these facts, the Supreme Court held that the three widows had

not the status of an association of persons within the meaning of Section 3 of the Income Tax Act. Dwarakannatk Harischandra Pitata, In re

related to persons inheriting immovable property in equal shares under a will and the legatees jointly managing the properties. Beaumont C.J. and

Blackwell J. were of the view that they constituted an association of persons. The learned Chief Justice, with whom Blackwell J. agreed, observed

:

I think this case is really governed by the decision of this court in Commissioner of Income Tax v. Laxmidas Devidas in which we held, following

the principle laid down by the Calcutta High Court in In re B. N. Elias, that two persons who had purchased property and managed it for the

purpose of producing income were properly assessed as an association of individuals u/s 3 of the Indian Income Tax Act.

The only distinction between that case and the present one is that the original association in the present case was not a voluntary act on the part

of the assessees. They did not purchase the property for the purpose of managing it; they received it under a will, and it may be said, that in the first

instance they did not constitute an association of individuals. But as soon as they elected to retain the property and manage it as a joint venture

producing income, it seems to me that they became an association of individuals within the meaning of the Income Tax Act, and that they are

properly assessed as the owners of the property u/s 9.

It may be seen that in the Bombay case, though the acquisition was involuntary, the legatees having elected to retain the legacy and manage the

same as a joint venture producing income, that, it was thought, was sufficient to view the combination as an association of persons within the

meaning of Section 3. But in contrast the observations of the Supreme Court in Commissioner of Income Tax v. Indira Balkrishna, particularly

those in the last paragraph therein, have been strongly relied on for the assessee. They are these :

The only finding is that they (widows) have not exercised their right to separate enjoyment, and except for receiving the dividends and interest

jointly, it has been found that they have done no act which has helped to produce income in respect of the shares and deposits. On these findings it

cannot be held that the three widows had the status of an association of persons within the meaning of Section 3 of the Indian Income Tax Act.

It is pointed out for the assessee that at the same time, earlier in the same judgment, the Supreme Court approved the tests laid down by

Dwarakanath Harischandra Pitale, In re. It seems to us that it will be sufficient to say that, so far as the reference before us is concerned, the four

brothers joined in the acquisition of 250 shares out of the joint funds lying to their credit in the common account. That joint enterprise was

undoubtedly with a view to derive profits and that, in our opinion, will stamp the combination as an association of persons so for as the income

derived by way of dividends from the shares is concerned. This deduction is supported by the further facts that, though the eldest boy was a major

at the time the grand-father made a gift of life-interest in the house to his four grand-sons, he did nothing to assert his right to manage his share

separately. He allowed the mother to manage the house as also the shares. The second boy too, on attaining his age of majority, behaved likewise.

After February 15, 1959, the eldest brother took the place of the mother and acted for the four brothers. This was the position right through the

assessment years in question.

The argument for the assessee is that the house property having been acquired by the four brothers involuntarily, they became but co-owners

and neither the act of their mother nor the act of the eldest brother after February 15, 1959, would in any way militate against or was inconsistent

with their being but co-owners. We recognise the force underlying the argument. The co-ownership by itself may not necessarily be an association

of persons. To make an association of persons, something more is required. That, we think, is present in this case in the form of management by

the mother of the four boys and later by the eldest of the boys, including joint acquisition of shares. No doubt, the combination of persons should

be for the purpose of producing income by their joint act or venture in that direction. We do not think that the house automatically produced

income, for, the mother could have kept quiet and not let out the house at all in which case no income would have been derived. Her act on behalf

of the four boys undoubtedly produced income in that sense. The same reasoning would apply to the dividends derived from the shares. It is this

enterprise which in our opinion distinguishes the combination from mere co-ownership. But while it will follow from our observation that the four

brothers constituted an association of persons in regard to the house property, they will be governed by Section 9(3) of the Income Tax Act. That

section presupposes that, even if co-owners who derived income from the house constituted an association of persons, nevertheless they should

not be assessed in that status but only as individuals. In our opinion, the requisites of Section 9(3) are satisfied. For the revenue it is stated that the

settlement deed in favour of the four boys is silent as to the shares they should take. The deed is not before us. But assuming that the deed is silent,

we have no doubt that when the settlement deed conveyed property in favour of the four persons and stated nothing as to how they should share, it

would mean that they should share equally.

We are of the view, therefore, that as regards the income from the house property the four brothers will be assessed as individuals u/s 9(3) but

as regards the income from the shares, they will be regarded as an association of persons and assessed in that status. The reference is answered in

favour of the revenue but only in respect of the income from the shares. We may record that this reference has been argued at the Bar with

assiduity and ability. Though we make no direction as to costs, we think that counsel for the revenue will be entitled to Rs. 250 as his fees.