Smt. G.N. Sunanda vs Commissioner of Income Tax

Rajendra Babu, J.—One Murugappa who held partnership, interest in three firms died on 17-11-1972 leaving his widow, minor son and a minor daughter. During his lifetime, the income from each of these three firms was assessed in his hands in the status of a HUP. After his death, his wife, the applicant herein became the partner in the firms in which he was a partner in his individual capacity. The ITO initiated proceedings u/s 148 of the income tax Act, 1961 (''the Act'') to assess such share income in the hands of the applicant and her children as an AOP. The applicant filed her return declaring that she had no income in that status. Her case was that her income should have been assessed as HUF. But, the ITO rejected this plea and brought to tax the income in question in the hands of an AOP. The applicant took up the matter in appeal and the AAC held that the applicant and her children inherited the business interest of the deceased Murugappa as co-heirs and succeeded to them in their individual capacity and such property did not constitute HUF property and, therefore, he confirmed the assessment made by the ITO. On further appeal to the Tribunal, it held that though the applicant succeeded to the interest of late Murugappa in the said firms, she was a partner and income derived by her would belong not only to her but to her minor children under the Hindu Succession Act, 1956, and since the source of income is business, the income derived by the applicant was not only on her behalf but on behalf of the minor children and, therefore, the orders of the income tax authorities must be upheld and, thus, the appeal was dismissed. Aggrieved by the said order of the Tribunal, the applicant sought for reference u/s 256(1) of the Act for the opinion of this Court and the following question has been referred to us:

Whether, on the facts and in the circumstances of the case, the assessment of the share income from the three firms in the hands of the association of persons or body of individuals for the year 1974-75 is valid in law?

The expression ''AOP'' or ''BOI'' have been considered in several decisions of the Supreme Court and the High Courts and a survey of the same is to the following effect.

In order to constitute an AOP there must be joining together in a common venture, the object of which is to produce income, profits or gains. Though a BOI is not identical with AOP they have similarities: AOP may consist of non-individuals, but BOI consists of only human-beings. ''Body'' in BOI would mean association for some common purpose or object and there must be unity under some common tie or occupation. A mere collection of individuals without a common tie or aim will not constitute BOI u/s 2(31) of the Act and u/s 47(ii) of the Act. A BOI must be capable of holding income producing asset or asset that produce income.

A group of persons may come together in the following situations:

(i) members joining together for income producing activity.

(ii) group of individuals irrespective of object which brought them together and what they do.

(iii) group of individuals happen to have come together to carry on some activity with a view to earn income.

Of these, the last group alone would constitute a BOI. However, a combination of individuals who merely receive income jointly without doing anything further cannot constitute either AOP or BOI.

In the present case, the question is whether by mere fact that the applicant and her two children being joint inheritors and the applicant carrying on business during minority of the children on their behalf be assessed as BOI or AOP.

In the case of Commissioner of Gift Tax, Kerala Vs. R. Valsala Amma, the Supreme Court had to consider a case where the assessee and her sister received as legatees under the will of their mother certain immovable property, each of them having half share in the same. The property not having been partitioned, they in turn jointly gifted the said immovable property to their brother by a single gift deed and the question which was considered for the purpose of the Gift-tax Act, 1958 was whether the assessee and her sister could be assessed in respect of the gift as separate individuals or as an AOP or BOI. The Supreme Court answered this question in the following manner:

Now the question is in what capacity the gift was made by the assessee. Did they do it as an association or as a body of individuals or as individuals? The property received by the assessees under the will of their mother was admittedly received by them as co-tenants. Each one of them had half share in that property. The question whether they divided that property or not is not a material question. In law each one of them had half the right in the property that they gifted to their brother. They were holding that property as tenants-in-common and not as joint tenants. Hence they made the gift as tenants-in-common and not as joint tenants. Each one must be held to have made a gift of her share of the property though the gift is made through one single document. It is surprising that the income tax Officer or the Appellate Assistant Commissioner or the Tribunal should have ever thought that the gift in question was by an association or by a body of individuals. The Gift-tax Act did not change the general law relating to the rights of property. It merely sought to tax a gift of the property owned by a person. As mentioned earlier the property with which we are concerned in this case is a property owned by two persons as tenants-in-common, each one having a definite share. (p. 830)

Relying on this decision it was contended on behalf of the assessee that under Hindu law the applicant in this case and her two children have equal shares in the business interest that devolved upon them from the deceased Murugappa. The applicant carried on the business in her individual capacity and also as guardian or trustee of minor children and, therefore, they cannot but be assessed as individuals.

Shri Srinivasan, the learned counsel for the revenue, submitted that though in view of the decision in R. Valsala Amma''s case (supra) the applicant and her children inherited the property as individuals, but in view of the fact that the applicant became the partner in the business and she having carried on business on her behalf and on behalf of her minor children, a BOI or AOP was certainly constituted. He also submitted that in the case of immovable property all that happens is that they merely inherit the property and receive the income; whereas in the case of business the individuals have to come together and carry on business and several transactions have to be entered into in connection therewith. Therefore, they act in concert together and this certainly amounts to a BOI or AOP.

In the present case, all that happened is that the applicant has merely carried on the business as it was done earlier and there is no overt act or tacit act on her part to indicate that she was not carrying on the business as partner of the firm in her own capacity and on behalf of the minors in a [representative capacity as guardian. There is no material placed before the Court to infer a conduct on the part of the applicant that she had given her consent on behalf of the minors to carry on the business; either as an AOP or as BOI. Her conduct is consistent with the fact that she could as well have carried on the business in the dual capacity on her own behalf and on behalf of the minors in a representative capacity. There could be no unity of interest in this case as the partnership interest is certainly divisible and the applicant and her children had defined shares in the same and could receive profits in the same ratio.

However, Shri Srinivasan placed strong reliance on the three decisions. Firstly, on the decision in Deccan Wine and General Stores Vs. Commissioner of Income Tax, Even in that case while expounding the meaning of the expression ''body of individuals'' their Lordships observed that the same may not include a case of co-heirs inheriting the shares or securities and laid down a test that it should be wide enough to include a combination of individuals who have a unity of interest. In the next decision relied on by him this view was followed by the Gujarat High Court in the case of Commissioner of Income Tax, Gujarat III Vs. Harivadan Tribhovandas, and in the third decision referred, rendered by the Punjab and Haryana High Court in the case of Meera and Company Vs. Commissioner of Income Tax, In these two cases, the Gujarat and Punjab and Haryana High Courts have adopted the reasoning of the Andhra Pradesh High Court in Deccan Wine & General Stores case (supra). But in Deccan Wine & General Stores case (supra), the true effect of the decision in the case of R. Valsala Amma (supra) was not considered by the Andhra Pradesh High Court. Their Lordships distinguished the case on the ground that it is a case of the Gift-tax Act and not one of the income tax Act though this aspect was criticized by the Gujarat High Court but they adopted the reasoning of the Andhra Pradesh High Court. The test of unity of interest is absent in the present case. Therefore, these three decisions cannot be of any assistance to Shri Srinivasan. However, Shri Srinivasan, contended that in view of the decision in the case of M. M. Ipoh Vs. Commissioner Of Income Tax, Madras., it is possible and permissible for a minor through her guardian to become a member of BOI or AOP, but such expression or assent could be given by acting through the guardian. As stated earlier, in the present case there is absolutely no material to indicate that the applicant had given her assent on behalf of the minors to carry on the business, jointly or together or as a BOI or AOP. However, Shri Srinivasan, contended that even persons holding representative capacity while as a guardian could become a member of an AOP and all the three capacities are in one and the same person so that she could act not only on her own behalf but also as guardian of the two minors. He strongly relied on the decision in the case of N.V. Shanmugam and Co. Vs. The Commissioner of Income Tax, Madras, in which it was held by the Supreme Court that business carried on by three receivers on behalf of different groups of persons in a partnership business which had been stopped, to reopen and conduct the business for the purpose of winding up. The profits in their hands could be assessed in the status of an AOP, Inasmuch as the receivers represented the interest of the several partners and the business was carried on by them on behalf of the erstwhile partners in their concern and the control and management in their hands as receivers was a unified one. The receivers had joined in a common purpose and had acted jointly and, therefore, they had a common interest created by the order of the Court and were on that account an ''association of persons''. The existence of a specific or a defined interest in the profits did not make any difference. But, this decision is not applicable to the situation arising on the facts of the present case at all, because in that case a partnership business which was carried on by the erstwhile partners came to be stopped and that business was continued in the course of winding up. Therefore, certainly there was a unity of purpose and the receivers had acted jointly. Such a situation does not arise here at all in the present case. Now, it is necessary to refer to two more decisions; firstly the case of Commissioner of Income Tax Vs. C. Karunakaran and Others, where a sole proprietor of a business died and his widow and children succeeded to the same. The mother and the daughters executed a deed of relinquishment giving up all their rights in the business. The High Court held in those circumstances that the heirs should be assessed as an AOP because of their common object or common activity. However, one factor is significant in that case, i.e., the mother and the daughters relinquished all their rights in the business so that the sons could together carry on the business, the consent of the mother as guardian being inferable from the conduct of the parties. No such material is available in the present case. Secondly, the decision in N.P. Saraswathi Ammal and Others Vs. Commissioner of Income Tax, Madras, where on the death of her husband, Saraswathi Ammal along with her minor children succeeded to the business of bus service which she operated even after the minors attained majority. The Madras High Court held that even after they attained majority they continued the business together and the integrity of the business continued showing a clear indication that mother and children were keeping in step as a BOI. Considering the nature of business in that case and that even after attaining majority they continued the business together were positive indications of unity of interest in the group. So the facts and circumstances and principles applicable in such a case can have no bearing on the case on hand. Therefore, we are of the opinion that the question has to be answered in the negative and in favour of the assessee.