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PETITIONER: COMMISSIONER OF INCOME- TAX, BOMBAY

       Vs.

RESPONDENT: SMT.  INDIRA BALKRISHNA

DATE OF JUDGMENT: 14/04/1960

BENCH: DAS, S.K. BENCH: DAS, S.K. KAPUR, J.L. HIDAYATULLAH, M.

CITATION:  1960 AIR 1172            1960 SCR  (3) 513  CITATOR INFO :  R          1961 SC1043  (6,7,8)  RF         1961 SC1261  (6)  RF         1965 SC1752  (8)  R          1968 SC 317  (22)  RF         1970 SC1707  (8)  R          1973 SC2369  (7,10)  RF         1977 SC 394  (5,6)

ACT:        Income-tax-Association     of   Persons-Meaning    of-Indian        Income-tax Act, 1922 (XI of 1922), s. 3.

HEADNOTE: 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 514 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. In  Ye : B. N. Elias, [1935] 3 I.T.R. 408,  Commissioner  of Income-tax, Bombay v. Laxmidas Devidas, [1937] 5 I.T.R.  484 and  Re.   Dwayakanath Harishchandra, [1937] 5  I.T.R.  716, approved.

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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 Incometax 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        515        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        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.  There was an appear  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.   The  Appellate  Assistant        Commissioner  rejected  point (a) but  accepted  point  (b).        Then, there was a further appeal to the

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      516        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.   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 ? "        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        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        517        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.        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.  The Tribunal  found  that  the        widows in this case did not exercise their right to separate

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      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." 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 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 68        518        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."        519        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

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      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 OD e 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.        520        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

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      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.        (1) [1937] 5 I.T.R. 484.      (2) [1937] 5 I.T.R. 716.        (3)  [1935] 3 I.T,R. 408.        521        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  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.