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PETITIONER: G. MURUGESAN & BROS.

       Vs.

RESPONDENT: C.I.T., MADRAS

DATE OF JUDGMENT08/02/1973

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. REDDY, P. JAGANMOHAN KHANNA, HANS RAJ

CITATION:  1973 AIR 2369            1973 SCR  (3) 515  1973 SCC  (4) 211

ACT: Income-tax-’Association   of   Persons’-What    constitutes- Volition on part of members’ an essential ingredient-In case of  realisation of dividends there is no act of  management- The  statement  of  members that they  had  started  drawing dividends separately must be accepted in absence of facts to the contrary-They must be assessed as ’Individuals.’

HEADNOTE: For the years 1957-58 to 1962-63 the assessees were  assesed by  the Income-tax Officer as an ’Association  of  Persons.’ They  had  filed their returns for the first  two  of  these years as ’Association of persons but in 1959-60 they claimed that  they had divided their interest in the shares held  by them  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  assesseess should  be assessed as ’Individuals’ and not as  Association of Persons’.  The High Court in reference answered in favour of  the Revenue.  In appeal by certificate it was  urged  on behalf  of  the assessees appellants that the facts  that  a joint  gift  of shares was made in favour of more  than  one person  or  those shares were registered  jointly  in  their names  or  even  the fact that  the  dividend  was  realised together  did  not go to show that the shareholders  or  the beneficiaries did act as an ’Association of Persons.’ HELD  :  (i)  For forming an ’Association  of  Persons’  the members  ,of  the  association must join  together  for  the purpose  of producing income.  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 members of the association is an  essential ingredient. [519F-G] 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 or more shareholders functioned  as  an ’Association  of  Persons’,  from the mere  fact  that  they jointly  own  one  or more shares and  jointly  receive  the dividends   declared.    These  circumstances  do   not   by themselves go to show that they acted as an ’Association  of

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Persons’. [519G-H] (ii)For  the years 1957-58 and 1958-59, the assessees  were rightly  assessed as an ’Association of Persons’ because  of their  own  admission  which  was  an  import-ant  piece  of evidence. [519,H; 520A-B] (iii)For  the  years  1959-60  and  1962-63  they   had specifically stated that they were no more functioning as an ’Association of Persons’.  In the case of an ’Association of Persons’.  It is always open to its members to withdraw from the  same.  No one can be compelled to continue as a  member of  an association.  For withdrawing from an association  no particular form need be observed. [520C-D] In the present ease the question related only to realisation of dividends.  If the individual members of the  association choose to realise their dividends as individuals there is an end  of the association.  The assesees’ assertion that  they bad  realised their dividends in their  individual  capacity remained  unrebutted.  There was nothing to  disprove  their claim.  None of 516 the  facts proved could be said to be inconsistent with  the claim made by them. [520D-E] The  answer, therefore, in respect of the years  1959-60  to 1962-63 must be in favour of the assessees. [521C-D]

JUDGMENT: 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. N.   D.  Karkhanis, S. P. Nayar and R. N. Sachthey, for  the respondents. 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 Reference under Section 66(1)  of  the  Indian Income-Tax  Act, 1922 (to be hereinafter referred to as  the Act). The question of law referred for ascertaining the opinion of the High Court 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 the assessment years 1957-1958 to 1962-63.   In all   these  years  the  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’.  Therefore, the only question that calls  for  decision  is as to the status  of  the  assessee during the relevant assessment years. For deciding the question formulated above, it is  necessary to  divide  the assessment years into two groups.   For  the 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 stated that they have divided  their  interest in the shares  and  therefore  they

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should  be  thereafter  assessed as  ’individuals’.   It  is necessary  to  mention  one  other  circumstance  before  we proceed to set out the relevant facts.  The income in  which we are concerned in this case arises under two heads.   Part of the income arises from house property                             517 and the remaining ’income arises from dividends from shares. So  far 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 need not go into that aspect.  All that we have to, decide  in the present case is whether the  dividend  income which  is  the  subject-matter cf these  appeals  should  be assessed in the hands of the appellants. as an  ’Association of Persons’ or as ’individuals’. Now,  we  shall  refer to the material  facts  as  could  be gathered’  from  the  case stated, by  that  Tribunal.   One Sinnamani  Nadar(who  will  be hereinafter  referred  to  as ’Nadar’)  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  cut.   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 in Joint Stock  Companies  in the.  name of ’G.  Murugesan & Brothers’.  For each of  such purchase,  a debit entry was made in the books of the  firm. The  share applications addressed to. the companies for  the transfer of the shares from the, prior owners to the name of G. Murugesan and Brothers were, signed by Padamavathy Ammal, the  mother  of donees as their guardian.  The  donees  were minors  at the time most of these transactions; took  place. Murugesan  be-came  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, 1.962.  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 account$ 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   individual 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  gifted  by  Nadar to his  grandsons.   As  mentioned earlier  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 On  the  basis of the above facts, the  Income  Tax  Officer assessed the assessee during 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 to the Appellate Tribunal,  the  Tribunal held that the assessee ,should be assessed as  ’individuals’ and not as ’Association of Persons’.  At the instance of the

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Commissioner,  the question set out earlier was referred  to the  High Court.  The High Court answered 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  Padmayathy 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  regis- tered  jointly  in  their names or even the  fact  that  the dividend  was 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 consideration  before this  Court  in  more than one  case.   In  Commissioner  of Income-tax,  Bombay,  North, Kutch and Saurashtra  v.  Indra 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  : In  re.   B. S. Elias (1935) 3 I.T.R. 408;  Commissioner  of Income-tax  v. Laxmidas Devidas (1937) 5 I.T.R. 548; and  In re Dwark-anath Harishchandra Pitale (1937) 5 I.T.R. 716.  In re  B. N. Elias 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  one in  which  two or more persons join in a common  purpose  or common  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  gains. This  was  the  view expressed by Beaumont,  C.J.,  in  Com- missioner  of income-tax v. Lakshmidas Devidas, at page  589 (1937) 5 I.T.R., and also In re: Dwarkanath Harishchandra.                             519 Pitale.  In re : B. N. Elias, Costello, J., put the test  in more forceful language.  He said : "It may well be that  the intention  of,  the Legislature was to hit  combinations  of individuals   who  were  engaged  together  in  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 joint enterprise  then I think no difficulty arises whatever in the way of saying that .... these persons did constitute an association.........". We think that the aforesaid decision correctly lay down  the crucial  test for determing what is an ’Association  persons within  the meaning of section 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 intention.  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 section  3;  it  must depend on  the  particular  facts  and circumstances of each case as to whether the conclusion  can be drawn or not."

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In the course of that judgment, this Court also observed               "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 windows performed in respect thereof which               produced or helped to produce income." For forming an ’Association of Persons’, the members of  the association must join together for the purpose of  producing an  income.  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 essential ingredient.  It is true that even a minor 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 Persons’  from  the mere fact that they jointly own  one  or more  shares,  and jointly receive the  dividends  declared. Those  circumstances  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 returns  in the status of ’Association of  Persons’.   Those returns were 520 niether  withdrawn  nor  did  they  file  fresh  returns  as ’individuals".   It was for the first time in the appeal  it was  argued on their behalf that they should not have  been assessed as ’Association of Persons’.  ’The question whether the assessees function as on ’Association of Persons’ during those years was best known to them.  Their admission 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, the same result  does  not follow.  They themselves have specifically stated that  they are no more functioning as ’Association of PerSons’.  In the case  of ’association of persons’ it is always open  to  its members to 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, herein we are  concerned  only with  the  realisation  of  dividends.   If  the  individual members of the association choose to realise their dividends as  individuals,  there is an end of the  association.   The assessee’s assertion that they have realised their dividends in their individual capacity remains un rebutted.  There  is nothing  to disprove that claim.  None of the  facts  proved can be 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 1962-63, the assessees should be held, as having  functioned as an ’association of persons’.  Mr. Karkhanis in support of the  contention  of Revenue relied on the  decision  of  the Bombay  High  Court  in 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, should the dividend deemed to have  been declared to the shareholders must  be  considered has  been  taken by a husband and wife who  were  the  joint

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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 other hand the contention of the assessee was that  they were  an  ’Association of Persons’ and that  contention  was accepted by the 521 Court.   The  ratio of that decision has no bearing  on  the point in issue in the present case.  We are also not able to agree with Mt.  Karkhanis that the decision of this Court in N. 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  decision of this Court in Commissioner  of  Income-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 costs.  Civil Appeals Nos.  687- 690  of  1970  are  allowed  with  costs-one  hearing   fee. Consequently  the  answer given by the High Court  in  those four  appeals is discharged and in its place, we answer  the question, in the negative and in favour of the assessee. G.C. 522