Commissioner Of Income- Tax vs Smt. Indira Balkrishna (Supreme Court)

Section 2(31)(v) of the Income Tax Act ,1961 with Explanation

“Person” includes an association of persons or a body of individuals , whether incorporated or not ,with Explanation as under :

For the purpose of this clause , an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person , whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income ,,profits or gains .

An AOP must be a combination of persons formed for the promotion of a joint enterprises for producing income as per income tax law .

An association of persons is one in  which two  or more  persons join in a common purpose  or  common action and, for purposes of the income-tax law, one of    its objects  must  be to produce income, profits or   gains.

The following judgement of the Hon’ble Supreme court of India makes its very clear regarding Association of persons is for the promotion of a joint enterprises to earn income .

Brief summary of the case :

A Hindu governed by the Mitakshara School of Hindu Law died leaving  three widows as his legal heirs.  The  widows    took the estate as joint tenants and did not exercise their right to  separate possession and enjoyment. The main income was from dividends and from immovable property.  The latter   was held  under  s.__ 9(3)  of  the Income-tax  Act not  to  be assessable as income of an association of persons.  The question was whether    the three widows could be assessed as an association of  persons in respect of the rest of the income:

Held,  that the three widows did not have the status  of  an association  of   persons within the meaning of s. 3  of   the Income-tax  Act.  An association of persons is one in  which two  or more  persons join in a common   purpose  or  common action   and, for purposes of the income-tax law, one of    its objects must  be to produce income, profits or gains.    It must be a combination of persons formed for the promotion of a  joint  enterprise for producing income.  In the  present case except for receiving the dividends and interest jointly the  widows  had  done no act which helped  to produce   the income.

Full text of the judgement for the readers

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Supreme Court of India

Commissioner Of Income- Tax vs Smt. Indira Balkrishna on 14 April, 1960

Equivalent citations: 1960 AIR 1172, 1960 SCR (3) 513

Author: S Das

Bench: Das, S.K.

JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 249 & 250 of 1958.

Appeals by special leave from the judgment and order dated March 7, 1956, of the Bombay High Court in I.T.R. Nos. 52 and 53 of 1955.

K.N. Rajagopal Sastri and D. Gupta, for the appellant (in both the appeals).

N.A. Palkhivala, S. N. Andley and J. B. Dadachanji, for the respondent (in both the appeals).

1960. April 14. The Judgment of the Court was delivered by S. K. DAS, J.-These two appeals with special leave have been heard together. They arise out of similar facts and the question of law arising therefrom is the same.

The short facts are these. One Balkrishna Purushottam Purani died on November 11, 1947. He left behind him three widows and two daughters. The three widows were named Indira, Ramluxmi and Prabhuluxmi. These widows as legal heirs inherited the estate of the deceased, which consisted of immovable properties situate in Ahmedabad, shares in Joint Stock Companies, money lying in deposit, and share in a registered firm. For the two assessment years 1950-51 and 1951-52 (the corresponding account years being the Sambat years 2005 and 2006).

The returns were filed by the assessee

 the Income tax Officer issued notices to the legal heirs of Balkrishna Purushottam Purani. Pursuant to those notices, returns were filed under the heading, ” Legal heirs of Balkrishhna Purushottam Purani “, in one case and in the name of the ‘estate of Balkrishna in the other; the status was shown as ” individual ” in one case and ” association of persons ” in -the other. They were signed by Indira, one of the three widows. For the assessment year 1950-51 the total income was shown as under-

Rs.

Property.. 11,011
Share from registered firm. 4,071
Dividends. 51,796
Interest.. 22,343
Ground rent…. 125
Total….. 69,346

For the assessment year 1951-52, the total income was shown as-

Rs.

Property-. 10,879
Share from registered firm. 460
Dividends. 80,426
Interest on deposits….. 536
Ground rent…. 125
Total….. 92,426

The ITO took the status of the assessee as AOP in both the cases

For both years the Income-tax Officer took the status of the assessee as an ” association of persons ” and on that footing made two assessment orders.

Appeal by assessee to the Appellate Asstt. Commissioner not to assess the cases as AOP

 There was an appeal to the Appellate Assistant Commissioner, and two of the points taken before him were(a) that the three widows ought to have been assessed separately and not as an ” association of persons “, and (b) that in any event, the income from property ought to have been assessed separately in the hands of the three widows by reason of the provisions in s. 9(3) of the Income-tax Act, 1922.

Decision of the Appellate Asstt. Commissioner .

The Appellate Assistant Commissioner rejected point (a) but accepted point (b).

Appeal to the ITAT by the assessee and ITAT held the status of the assessee as AOP

Then, there was a further appeal to the Income-tax Appellate Tribunal, Bombay. The Tribunal held that the entire estate of deceased Balkrishna Purushottam Purani was inherited and possessed by the three widows as joint tenants and its income was liable to be assessed in their hands in the status of an association of persons. The Tribunal further held that the Appellate Assistant Commissioner was wrong in holding that the shares of the three widows were definite and determinable and s. 9(3) was applicable.

Application by the assessee to ITAT to refer certain questions to the High Court

The assessee then moved the Tribunal to refer certain questions of law which arose out of its orders to the High Court of Bombay. The Tribunal referred four such questions, but we are now concerned with only one of them, viz., question No. 3 which was in the following terms:

” (3) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the assessment made on the three widows of Balkrishna Purushottam Purani in the status of an association of persons is legal and valid in law ? “

Decision of the High court in favour of the assessee that the three widows could not be assessed in the status of an AOP

Two references were made to the High Court in respect of the orders passed for two assessment years and they gave rise to Income-tax References Nos. 52 and 53 of 1955. The leading judgment was given in T. T. It. 52 of 1955. The High Court held that the Tribunal was in error in coming to the conclusion that the three widows could be assessed in the status of an association of persons with regard to the income which they earned as heirs of their deceased husband. Therefore, it answered question No. 3 in the negative.

The High Court narrated

” what is required before an association of persons can be liable to tax is not that they should receive income but that they should earn or help to earn income by reason of their association, and if the case of the Department stops short at mere receipt of income, then the Department must fail in bringing home the liability to tax of individuals as an association of persons.”

The department representative obtained special leave to appeal against the judgement of the High Court and leave was granted to the department by the Hon’ble SC.

The department represented by the Commissioner of Income-tax, Bombay, then applied to this Court and obtained special leave to appeal from the judgment and orders of the High Court of Bombay in the two References. These two appeals have been filed in pursuance of the special leave granted by this Court. The appellant is the Commissioner of Income- tax, Bombay, and the assessee is the respondent. The argument on behalf of the appellant is that the High Court was in error when it said that ” what is required before an association of persons can be liable to tax is not that they should receive income but that they should earn or help to earn income by reason of their association, and if the case of the Department stops short at mere receipt of income, then the Department must fail in bringing home the liability to tax of individuals as an association of persons.” It is submitted that the High Court did not, in the

statement quoted above, lay down the correct test for determining what is an ” association of persons ” for the purposes of the Income-tax Act.

Now hearing the arguments of the department what the Hon,ble SC said

Before we go on to discuss the argument presented on behalf of the appellant, it is necessary to clear the ground by stating what is the position of co-widows in Mitakshara succession and what are the findings arrived at by the Tribunal. The position of co-widows is well-settled. They succeed as co-heirs to the estate of their deceased husband and take as joint tenants with rights of survivorship and equal beneficial enjoyment ; they are entitled as between themselves to an equal share of the income. Though they take as joint tenants, no one of them has a right to enforce an absolute partition of the estate against the others so as to destroy their right of survivorship. But they are entitled to obtain a partition of separate portions of the property so that each may enjoy her equal share of the income accruing therefrom.

Findings of the Tribunal noted by the Hon’ble SC

The Tribunal found that the widows in this case did not exercise their right to separate possession and enjoyment and ” they chose to manage the property jointly, each acting for herself and the others and receiving the income of the property which they were entitled to enjoy in equal shares.”

Ld counsel of the department stated before the Hon’ble SC

Learned counsel for the appellant has emphasised before us the aforesaid finding of the Tribunal and has contended that on the finding of joint management, the widows fulfilled even the test laid down by the High Court and constituted an an “association of persons” for taxing purposes.

The Hob’ble SC view on the judgement of the High Court

The High Court, however, rightly pointed out that the only property which the widows could have managed jointly was the immovable property which fetched an income of about Rs. 11,000, and as to that property, the Appellate Assistant Commissioner had held that s. 9 (3) applied. There was no appeal by the Department against that finding and it was not  open to the Tribunal to go behind it. Even on merits the Tribunal was wrong in thinking that the respective shares of the widows were not definite and ascertainable. They had an equal share in the income, viz., one-third each, and the provisions of s. 9 (3) clearly applied in respect of the immovable property.

With regard to the shares, dividends and interest on deposits there was no finding of any act of joint management. Indeed, the main item consists of the dividends and it is difficult to understand what act of management the widows performed in respect thereof which produced or helped to produce income. On the contrary, the statement of the case shows that the assessee filed lists of shares, copies whereof are marked annexure C and form part of the case, which showed that the shares stood separately in the name of each one of the three widows and this was not denied by the Department.

We now come to the main question in this appeal. What constitutes an ” association of persons ” within the meaning of the Income-tax Act ? It has been repeatedly pointed out that the Act does not define what constitutes an association of persons, which under s. 3 of the Act is an entity or unit of assessment. Previous to the year 1924, the words of s. 3 were ” individual, company, firm and Hindu undivided family.” By the Indian Income-tax Amendment Act of 1924 (Act XI of 1924) the words ” individual, Hindu undivided family, company, firm and other association of individuals ” were substituted for the former words. By the Income-tax Amendment Act of 1939 (Act VII of 1939) the section was again amended and it then said:

” Where any Act of the Central Legislature enacts that income-tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or members of the association individually.”

By the same Amending Act (Act VII of 1939) sub-s. (3) of s. 9 was also added.

Now, s. 3 imposes a tax ” in respect of the total income…………………. of every individual, Hindu un- divided family, company and local authority, and of every firm and other association of persons or the partners of the firm or members of the association individually.” In the absence of any definition as to what constitutes an association of persons, we must construe the words in their plain ordinary meaning and we must also bear in mind that the words occur in a section which imposes a tax on the total income of each one of the units of assessment mentioned therein including an association of persons. The meaning to be assigned to the words must take colour from the context in which they occur. A number of decisions have been cited at the bar bearing on the question, and our attention has been drawn to the controversy as to whether the words ” association of individuals ” which occurred previously in the section should be read ejusdem generis with the word immediately preceding, viz., firm or with all the other groups of persons mentioned in the section. Into that controversy it is unnecessary to enter in the present case. Nor do we pause to consider the widely differing characteristics of the three other associations mentioned in the section, viz., Hindu undivided family, a company and a firm, and whether in view of the amendments made in 1939 the words in question can be read ejusdem generis with Hindu undivided family or company.

It is enough for our purpose to refer to three decisions: In re: B. N. Elias and Others (1); Commissioner of Income-tax, Bombay v. Laxmidas Devidas and Another(“); and In re: Dwarakanath Harishchandra Pitale and Another(3); In In re: B. N. Elias and Others (1) Derbyshire, C. J., rightly pointed out that the word ” associate ” means, according to the Oxford dictionary, ” to join in common purpose, or to join in an action.” Therefore, an association of persons must be that in which two or more persons join in a common purpose or common action, and as the words occur in (1) [1935] I.T.R. 408. (2) [1937] 5 I.T.R. 484. (3) [1937] 5, I.T.R. 716.

a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. This was the view expressed by Beaumont, C. J., in Commissioner of Income-tax, Bombay v. Laxmidas Devidas and Another (1) at page 589 and also in Re: Dwarakanath Harishchandra Pitale and Another (2). In re: B. N. Elias (3 ) Costello, J., put the test in more force full language. He said “It may well be that the intention of the legislature was to hit combinations of individuals who were engaged together in some joint enterprise but did not in law constitute partnership .When we find that there is a combination of persons formed for the promotion of a joint enterprise then I think no difficulty arises in the way of saying that these persons did constitute an association .We think that the aforesaid decisions correctly lay down the crucial test for determining what is an association of persons within the meaning of s. 3 of the Income-tax Act, and they have been accepted and followed in a number of later decisions of different High Courts to all of which it is unnecessary to call attention. It is, however, necessary to add some words of caution here. There is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an association of persons within the meaning of s. 3; it must depend on the particular facts and circumstances of each case as to whether the conclusion can be drawn or not.

Learned counsel for the appellant has suggested that having regard to ss. 3 and 4 of the Indian Income-tax Act, the real test is the existence of a common source of income in which two or more persons are interested as owner or otherwise and it is immaterial whether their shares are specific and definite or whether there is any scheme of management or not. He has submitted that if the persons so interested come to an arrangement, express or tacit, by which they divide the income at a point of time before it emanates from the source, then the association ceases; otherwise it continues to be an association.

We have indicated above what is the crucial test in determining an association of persons within the meaning of s. 3, and we are of the view that the test suggested by learned counsel for the appellant are neither conclusive nor determinative of the question before us.

Coming back to the facts found by the Tribunal, there is no finding that the three widows have combined in a joint enterprise to produce income. The only finding is that they 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 s. 3 of the Indian Income Tax Act.

The Hon’ble SC rejected the appeal of the department

The High Court correctly answered question No. 3 in the negative. Accordingly, the appeals fail and are dismissed with costs. There will be one set of hearing fee in the two appeals.

Appeals dismissed.

(1) [1937] 5 I.T.R. 484. (2) [1937] 5 I.T.R. 716. (3) [1935] 3 I.T,R. 408.

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