G. Murugesan v. C.I.T., Madras

~ .. ### [ ' . .. G. MURUGESAN & BROS . _v._ 515. ## I . . ' C.I.T., MADRAS _February_ 8, 1973 [KS· JlEGDE, P: J~G~NMOHAN REDDY AND H. R. KHANNA, JJ.] Jncome-ta.~-·Assocwtton. _of._ Pcrds~ns'-What _constitutes-Volition on_ _f_ _members an essentm mgre 1_ _tent-_ 1 _n case_ _of realisation_ _of_ _divl-_ par~ _[0 ]_ _there_ _is_ - _no'_ _act_ _of management-The statement_ _of members that_ ~I ~ad _s/arted tfrawing dividends Separately must be accepted in_ _abse11ce_ _t. ._ \ - ~·, Jncome-ta.~-·Assocwtton. _of._ Pcrds~ns'-What _constitutes-Volition on_ _f_ _members an essentm mgre 1_ _tent-_ 1 _n case_ _of realisation_ _of_ _divl-_ par~ _[0 ]_ _there_ _is_ - _no'_ _act_ _of management-The statement_ _of members that_ ~I ~ad _s/arted tfrawing dividends Separately must be accepted in_ _abse11ce_ ~~~acts. _to_ _the_ conrrt~'-Tircy _must_ _be_ _asses.red_ _as 'Individuals.'_ F~r the years _1957-58,_ to 19.62~63 the assessee,s were assescd by the. Jocome·tax Officer as an Association of Persons. They bad filed their returns for the first two of these years as 'Association of persons' but jn !959-60 they claimed that they had di~·idcd their interest in the shares # I, Jncome-ta.~-·Assocwtton. ~~~acts. _to_ _the_ conrrt~'-Tircy _must_ _be_ _asses.red_ _as 'Individuals.'_ F~r the years _1957-58,_ to 19.62~63 the assessee,s were assescd by the. Jocome·tax Officer as an Association of Persons. They bad filed their returns for the first two of these years as 'Association of persons' but jn !959-60 they claimed that they had di~·idcd their interest in the shares held by ~hem and therefore· in respect of them they should be thereafter assessed as 'Individuals' •. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer. The Tribunal however held that the assessecss should be assessed as 'Individuals' and not as Association of Persons'. The Hjgh Court in reference answered in favour of the Revenue. D ln appeal by c'ertificate it was urged on behalf of the assessees appcllant3 ##### ( that the facts that a joint gift of shares was made in favour of more than ooo pcrsor. or those shares were registered jointly in their names or even the fact that the clividcnG was realised together did not go to show tlut the stmrc-hoklcr' or the beneficiaries did act as an 'Association of Perr.ons.' HELD: _(i)_ For forming on 'Assoc'iation of Persons' the rnembers of the association must join together for the purpose of producing ~teome. ~- ·~ssociation of Per..ons' can be formed only when two or mor.: md!~tdu~ls voluntarily combine together for a certain purpose. Hence ~oiJllo~ on the. part of the members of the association is an essential lngrcdtcnt. {519F·G] ~~ the case of receiving diviJ.::nd~ from shares where there is no r ~ueshon of any management it is difticult to draw an inference that ###### J [0 ] or more shareholders fun~t i oned 11s un 'Association of Persons', from cef mere f~c~ that they jointly own one or more shares and jointly reve the dtvH!eods declared. These circ'Umstances do not by themselves _go_ [10 ] Lhow that they acted liS an 'Association of Persons'. [5l9G·H1 i!. (ii) For the years 1957·58 and 1958-59 the usscssccs were rig~tly \\b~sed as an 'Association of Persons' because of their own admisston G fc~. was an import.ant piece of cvid.:nce. [519H; 5:!0A-BJ tn} [1] ") For the years 1959-60 and 1962-63 they ha.J s~:citk':llly s!at.:d the they were no more functioning a! an 'A~sociation of rcrsons • In to ~~'>e of an •Association _ol_ Persons' It is always open to rts ~embers l ~thdraw from the same No one' can b., compcl!t:d to co!"ll!lue a.s P<tti ~her of an association. _For_ withdrawing from an assocratao:n no •'\! ilr form n<.'(!d be obs~rved. (520C-D] 11 Ir ~~~ ti~.P~esent C'ase the question rdat~d. only _hto_ rea!isa:~lis~f t~i:/~&~: i!. (ii) For the years 1957·58 and 1958-59 the usscssccs were rig~tly <lends as r.vr~~l member.s of the assocratton c oose_. ~ion The assese~· a~rr lndJ\rJua l!l there is an cnJ of the as.~o~.:ta • : • I 'tv rernai~~ t~at tbbey had realised their ~iviJcnJd~ inothcefh~lrdicl~i~~ Nd'n~clof unrc ul!ed. There was notlung to tspr v 516 SUPREME COURT REPORTS (1973] 3S.C.R. the facts proved could be said to be inconsistent with the claim made by them. [5200-EJ The answer, therefore, in respect of the years 1959-60 to ·t962-63 must be i,h favour of the assessees. [521C·DJ CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 685 to 690 of 1970. . Appeals by certificate from the judgment and order dated 27th June 1968 by the Madras High Court at Madras in Tax case No. 308 of 1964. _M._ C. _Setalvad_ and _T._ _A. Ramachandran,_ for the appellant. B _N,_ _D._ _Karkhanis,_ _S;_ _P._ _Nayar_ and _R, N. Sachthey,_ for the res- C pondents. The Judgment of ·the Court was. delivered by HEGDE, J. These are connected appeals by certificate. They are directed against the decision of the High Court of Madras in a \{eference under Section 66 ( 1) of the Indian Income-Tax Act, D 1921. (to be hereinafter referred to as the Act) . The question of law referred for ascertaining the opinion of the High <::ourt was : . . "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?" In this case we are concerned with the assessment of the assessee for 1h_e assessment years 1957-1958 to 1962-63. In all these years tfie .assessees were assessed as an 'Association of the persons'. The contention of the assessees is that in the years, in question, they should have been assessed as 'individuals' and not as an 'Association of Persons'. Therefot:e, the only question that calls for decision is as to the status of the assessee · during the relevant assessment yea~. For deciding the question formulated above, it is necessary to divide the assessment years into two groups. For th~ assessment years 1957-58 and 1958-59 the assessees themselves- submitted their return in the status of 'Association of Persons', but for the later years, they submitted their retUrns as 'individuals'. In their returns ·for the assessment years 1959-60, they staled that they have divided their interest in the shares and therefore they should pe thereafter assessed as 'individuals'. It is· necessary ~ mentio~ one other circumstance before we proceed to set ourthe relevant facts. The income in which we are concerned in this case arises under two heads. Part of the income arises from house propertY E P' G G. MURUGESAN _v._ C.I.T. _(Hegde,_ ].) 517 A and the remaining income arises from dividends from shares. ~ f~r as the income from house property is concerned, the High Court has answered the question in favour of the assessee; the Revenue. has not appealed against that decision. Hence we nee~ nc't go into that aspect. . All that we have to decide in the present esse is whether the dividend income which i$ the subject-matter B cf these appeals should be assessed in the hands of the appellant$ <1~ an 'Association of Persons' or as 'individuals'. Now, we shall refer to· the material facts as could be ~athered from the case stated by that Tribunal. One Simiamam Nadar c D I F G H (who will be hereinafter referred to as 'N adar') and his son Ganesan partitioned their family properties on December 4, 1940. Thereafter, Nadar started a firm of his own on June 27, 1955. Later Nadar executed a settlement deed in favour of his four grandsons,_ namely, .G. Murugesan, ·G. Kathiresan, G. Raja Shankar and G. Vettrivel. The property covered by the said settlement deed included a house property, which had been let out. Under this settlement deed, the donees are to enjoy during the life time the properties gifted and thereafter the same was to devolve on their children. Sometime thereafter Nadar purchased a number of shares iri Joint Stock Companies in the name of 'G. Murugesan & Brothers'. For each of such purcbase, a debit entry was made in the books of the firm. The share applic:;ations (lddressed to· the companies for the transfer of the shares from the prior owners,to the name of G. Murugesan and Brothers were s.igned by Padamavathy Ammal, the mother of donees as their guardian. The donees were minors at the time most of these transactions; took place. Murugesan became a major on March 3, 1955. After 1959, Murugesan himself signed all transfer applications both on his behalf as well as on behalf of his brothers. The youngest of the brothers became a major on 15th December, 1962. The income from the house property and the dividend income from shares were credited to an account called "G. Murugesan & Brothers" in the books of Nadar's Firm. In those books. there are separate accounts for G. Murugesan; G. Kathiresan, G. Raja Shankar and G. Vetrivel. Private income and expenses of these persons were credited or debited to these individual accounts. At the end of each year the balance in the account of G. Murugesan & Brothers is transferred in equal proportion to the individmi.l accounts of the four persons mentioned above. There was a partition between Ganesan and his sons on 3rd February 1958, but that does not include the house property or the shares g,ifted by Nadar to his grandsons. As mentioned ear!ier for the assessment years 1957-58 and ·1958-59, the assessees submitted their returns in the status of 'Association of Persons' and thereafter they submitted their returns as individuals. .... 518 SUPREME COURT REPORTS (1973) 3 S.C.R. On the basis of the above facts, the Income Tax Officer assessed the assessee durin:g all the years mentioned earlier in the status of 'Association of Persons'. His orders were confirmed by the· Appellate Assistant Commissioner. But on a further appeal t~ the Appellate Tribu1,1al, the Tribunal held that the assessee should be assessed as 'individuls' and not as 'Association of Persons'. At the instance of the Commissioner, the question set out earlier was referred to the High Court. TheJJigh Court answer_ed_ that question in the affirmative and in favour of the Revenue. The High Court was of the opinion that because of the fact that the shares were purchased jointly in the name of G. Murugesan & Brothers, the transfer applications were filed by Padma vathy acting as guardian of all the assessees, and further, after Murugesan became major, he collected the dividends jointly on behalf of the assessees, the assessees should be considered to have acted as an 'Association of Persons'. That conclusion is challenged before us by Mr. Setalvad, appearing on behalf of the assessees. Counsel urges that the facts that a joint gift of shares was made in favour of more than one persons or those shares were registered jointly in their names or even the fact that the dividend wa~ realised together do not go to show that the shareholders or the beneficiaries did act as an 'Association of Persons'. On the other hand, it is contended on behalf of the Revenue by Mr. Karkhanis that the facts proved in this case clearly establish that the assessee functioned as an 'Association of Persons'. The expression 'Association of Persons' is not a term of art. That expression has come up for coniideration before this Court in more than one case. In _Commissioner_ _of_ _Income-tax, Bom-_ _bay, North, Kutch and Saurashtra_ v. _lndra Balkrishna_ (39 I.T.R. 546), this Court after referring to the various judgments, observed thus : "It is enough for our purpose to refer to three decisions : _ln_ _re._ _B._ _S._ _EUas_ (1935) 3 I.T.R. 408; _Commissioner_ _of_ _Income-_ _tax_ _v._ _Laxmidas_ _Devidar_ (1937) _5_ I.T.R. 548; and _In_ _re:_ _Dwarkanath Harishchandra Pitale_ (1937) _5_ I.T.R. 716. _In_ _re:_ B c D E F _B. N. Elias_ Derbyshire, C.J., rightly pointed out that the word G "associate" means, according to the Oxford Dictionary, "to joiR in common purpose, or to join in an action. Therefore, an association of persons, must be one in which two o_r more persons join in a common purpose or cominon action, and as the words occur in a section which imposes a tax on income, the association· must be one the object of which is to produce income, . profits or H gains. This was the view expressed by Beaumont, C.J., in _Com-·_ missio~r _of_ _Income-tax_ v. JAbhm~das _Devidas,_ at page 589· (1937) _5_ I.T.R., an(! also _ln_ _re:_ _Dwarkanath. Harishchandrli_ G, MURUGESAN _v._ C.I.T. _(Hegde,_ _J.)_ 519 _Pita/e._ _In_ _re_ : _B._ _N._ _Elias,_ Costello; J., put the test in more force A' B c .D F G ciation must join together for the purpose of producing an iricome. An ·Association of Persons' can be formed only when two or more individuals voluntarily combine together for a certain purpose. Hence volition on the part of the .member of the association is an r.ssential ingredient. It is· true that even a m!nor can join an 'Association of Persons' if his lawful guardian gives his consent. In the case of receiving dividends from shares, where there is no question of any management, it is difficult to draw an inference that two more shareholders functioned as an 'Association .of Per ~ns' from the mere fact that they jointly own one or more sharr.s. and jointly receive the dividends d.eclared. Those circumstances ful language. He said : "It may well be that the intention of the Legislature was to hit combinations of individuals who were engaged together i~ same joint enterprise but did not in law constitute partnerships . . . . when we find, . . . . . . . . . . . . that there is a combination of persons formed for the promotion of a jcint enterprise . . . . . . . . then I think no difficulty arises whatever in the way of saying that . . . . these persons did coll!titute an association. . . . . . . . . .. /'. We think that the aforesaid decision correctly lay down the cr:.~dal test for determing what is an 'Association persons within the meaning of section 3 of the Income-tax Act, and they have bc,~n accepted and followed in a number of later decisions of dHferent High Courts to all of which it is unnecessary to call intention .. It is, however, necessary to add some words of caution here. There is no formula of universal application as to what facts, bow many of them and of what nature, are necessary to come to a conClusion that there is an association of persons within the mean ing of section 3; it must depend on the particular facts and circum· stances of each case as to whether the conclusion can be drawn or not," Tn the course of that judgment, this Court also observed : "With regard to the shares, dividend3, 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 windows performed in respect thereof which produced or helped to produce income.'' For forming an 'Association of Persons', the members of the· asso H do not by themselves go to show that they acted as an 'Association of Persons'. But unfortunately for the assessee for the assessment years 1957-58 and 1958-59, they themselves had submitted their retums in the status of 'Association of Persons'. Those returns were s2o SUPREME COURT REPORrS [1973) 3 S.C.R. niether withdrawn nor did they file fresh returns as 'individuals'. It·was fonhe first time in the appeal, it was argued on their behalf 1hat they should not have been assessed as 'Association of Persons'. The question whether the assessees functiond as on 'Association of _Persons' during those years was best known to them. Their rui.mission in that regard is an important piece of evidence. They have made no attempt to show that the said admission was made under erroneous impression 'of law or is otherwise vitiated. Hence for those years they were rightly assessed as _an 'Association of Persons'. But so far as the other assessment years are concerned, A B the same result does not follow. They themselves have specifically c stated that they are no more functioning as 'Association of Per ~ons•: In the case of 'association of persons' it is always open to its members ~o withdraw from the same. No one can be compelled to continue as a member of an association. For withdrawing from an association there is no particular form need be observed. As seen earlier, herei.D. we are concerned only with the realisation D of dividends. If the individ11al members of the association choose to realise their dividends as inili;viduals, there is an end of the association. The assessee's assertion that they haye realised their -dividends in their individual capacity remains unrebutted. There is nothing to disprove that claim. Nope of the facts proved can be E said to be inconsistent with the claim made by them . . . For the reasons mentioned above, we are unable to agree with the High Court that during the assessment years 1959-60 to 196263, the assessees should be. held, as having functioned as an F "association of persons'. Mr. Karkhanis in support of the contention of Revenue relied on the decision of the Bombay High Court iD. _S._ C. _Gambatta_ v. _Commissioner_ _of Income-tax,_ _Bombay_ (14 I.T.R. 748). Therein, the only question was whether when an action is taken by an Income-tax Officer under Section 23A, G should the dividend deemed ·to have been declar~ to the shareholders must be considered has been taken by a husband and wife who were the joint holders of a share as an 'Association of Persons'' or by the husband alone who under the Articles of·Association was to act on behalf of the joint holders. The contention of the Revenue was that the husband alone was the shareholder. On the B other hand the contention of the assessee was that they were an •Ass<><:iation of Persons' and that contention was accepted by the B c G, MURUGESAN _V._ C.l.T, _(Hegde,_ J.) 521 Court. The ratio of that decision has no bearing on the point in. issueJn the present case. We are also not able to agr~ with Mr. K.arkhanis that the decision of this Court inN. _V._ _Shanmugham_ &: _Co._ v. _Commissioner_ _of_ _Income-Tax, Madras_ (81 I.T.R. 310) lends any support for the contention of the Revenue. On the other hand, therein this Court relied upon the deeision of this Court in _Commissioner_ _of_ _Incomi-tax, Bombay North, Kutch·&_ _Saurashtra_ v. _Indra Balkrishna_ (39 I.T.R. 546): In the result, Civil-Appeals Nos. 685 & 686 of 1970 are dis· missed with no order as to oo;ts. Civil Appeals Nos. 687-690 of 1970 are allowed with costs-<>ne bearing fee. Consequently the answer given by the High Court in those four appeals is discharged and in its plac~, we answer the question, in the negative and in favour of the assessee. G.C.