http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 7  

PETITIONER: MOHAMED  NOORULLAH,  REPRESENTING THE ESTATE  OF  LATE  KHAN

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX, MADRAS.

DATE OF JUDGMENT: 18/01/1961

BENCH: KAPUR, J.L. BENCH: KAPUR, J.L. HIDAYATULLAH, M. SHAH, J.C.

CITATION:  1961 AIR 1043            1961 SCR  (3) 515  CITATOR INFO :  RF         1961 SC1261  (6)  RF         1970 SC1707  (9)

ACT: Income-tax-Assessment of an association of persons-Business carried  on  by  Mohamedan-Continuance  by   heirs-Receivers appointed by consent of parties-Assessment on the  receivers as  income  of  an  association  of  persons-Validity-Indian Income-tax Act, 1922 (11 of 1922), s. 3.

HEADNOTE: The  business of manufacture and sale of a particular  brand of  beedies  was carried on by 0, a Mohamedan, who  died  in 1942 leaving a minor son, the appellant, by his pre-deceased wife,  his widow L, and four children by  her.   Proceedings were  taken  first  by the appellant and later on  by  L  in connection  with the partition of the properties left by  0, including  the  business,  and during the  pendency  of  the proceedings the business was carried on by receivers who had been appointed by the court by consent of parties on May 17, 1943.   The receivers continued the business  till  November 25,  1946,  when during the course of  the  proceedings  the business was put up for sale by auction between the co-heirs and  was  purchased  by the appellant.   For  the  years  of assessment,  1944-45  to 1947-48, for which  the  accounting years  were 1943 to 1946, the profits of the  business  were assessed to income-tax in the hands of the receivers as  the income  of an association of persons, and the claim  of  the appellant that the shares of the profits of each of the  co- heirs should have been separately taxed was rejected by  the income-tax authorities.  The facts showed that the  business was  inherited by the heirs of 0 and was carried on  without break during the accounting years first by L and another and then  by the receivers, that the nature of the business  was such  that  it  could not be divided up  and  that  all  the parties  desired that the business should be carried  on  as one whole with a unity of control. Held,  that on the finding that the business was carried  on by  the  consent of all parties as one unit  with  unity  of control,  the  co-heirs did form an association  of  persons within  the  meaning of S. 3 of the Indian  Income-tax  Act,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 7  

1922, and that the income of the business was assessable  as the income of an association of persons ; and the mere  fact that  a suit was pending at the time for the  administration of  the estate of the deceased or for the separation of  the shares  of  the  co-heirs did not affect  the  incidence  of taxation in the case. Commissioner  of  Income-tax, Bombay v.  Indira  Balkrishna, [1960] 3 S.C.R. 513, followed. 516 S.   C.  Mazumdar, Receiver, Trigunait Brothers’  Estate  v. Commissioner   of   Income-tax,  [1947]   15   I.T.R.   484, disapproved  in  so  far as it was  contrary  to  the  above decision of the Supreme Court.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 303 to  307 of 1960. Appeals  by special leave from the judgment and order  dated May 14, 1957, of the Madras High Court, in Case Referred No. 1 1 1 of 1953. R.   Ganapathy Iyer and G. Gopalakrishnan for the appellant. K.   N. Rajagopal Sastri and D. Gupta, for the respondent. 1961.  January 18.  The Judgment of the Court was  delivered by KAPUR, J.-These appeals are brought by special leave against the  judgment  and order of the High Court of Madras  in  an Income-tax reference under s. 66(1) of the Indian Income-tax Act,  hereinafter termed the " Act".  The question  referred was :-               "  Whether  the income-tax assessment  of  the               business of I Spade Clover Beedies’  belonging               to  the estate of the deceased and carried  on               during  the previous years 1943 to 1946 as  an               association  of  persons  for  the  assessment               years 1944-45 to 1947-48 is valid?  " And  this  question  was  decided  in  the  affirmative  and therefore against the appellants. The  facts  leading to the appeals are that one  Khan  Sahib Mohamed  Oomer  Sahib, who was carrying on the  business  of manufacture and sale of Spade Clover brand Beedies, died  on December  17,  1942, leaving a minor son  Mohamed  Noorullah (the   appellant)  by  his  pre-deceased  wife,   a   widow, Luthfunnissa  Begum, and four children by her who  were  all minors  at the date of the death of Oomer Sahib.   Noorullah through his next friend applied to sue in forma pauperis and during  the pendency of those proceedings two  Advocates  of the Madras High Court were appointed joint receivers of  the properties  of  the  deceased  on  March  17,  1943.    This appointment was by consent of parties.  On 517 May  10,  1943, the widow, Luthfunnissa, filed  a  suit  for partition and also applied for the continuance of the  joint receivers.   Noorullah  opposed this application but  by  an order  dated May 25,1943, the receivers were ordered  to  be continued  and they carried on the business as  before.   In due  course a preliminary decree for partition  was  passed. The High Court has observed that none of the parties  wanted to  break the continuity of the business after the death  of the  father.   In  the  beginning  Luthfunnissa  and  Dawood carried  on  the  business  and  from  the  date  of   their appointment,  i.e.,  May  17,  1943,  the  joint   receivers continued  the business till November 25, 1946, when  during the  course of the proceedings the business was put tip  for

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 7  

sale  by auction between the co-heirs and was  purchased  by Noorullah. The  years of assessment are 1944-45 to 47-48, the  relevant accounting  years for which were the calendar years 1943  to 1946.   The profits of the business were assessed to tax  in the  hands of the receivers as the income of an  association of  persons  and the contention of the  appellant  that  the share  of  the profits of each of the co-heirs  should  have been  separately  taxed,  was  rejected  by  the  Income-tax authorities as well as by the Income-tax Appellate Tribunal. The   only  question  which  was  raised  both  before   the department as well as before the Tribunal was the assessment to tax of the income of the business.  There was no  dispute in  regard to the income of the properties which  was  taxed under s. 9(3) of the Act. The  business was inherited by the heirs of Oomer Sahib  and was  carried  on without break during the  accounting  years first  by  the  widow and Dawood and  then  jointly  by  the receivers.   The  nature of the business was  such  that  it could  not  be divided up and had to be carried  on  as  one whole with a unity of control and all the parties desired to preserve and did preserve this unity.  The opposition by the appellant  to  the  application for  receivership  filed  on behalf  of Luthfunnissa, the widow, was only on  the  ground that the appellant wanted different persons to be  appointed and not to the continuance of the business or to the unity 518 of control.  The Income-tax Appellate Tribunal in its  order stated :-               "  In  fact,  there  was  no  change  in   the               continuity  of the business and from the  date               of death of Md.  Oomer Sahib up to 24th March,               1943,  the business was carried on  by  mutual               agreement  and consent by  Luthfunnissa  Begum               acting on her own behalf and on behalf of  her               minor  children  and her  minor  step-son  Md.               Noorullah.    There  can,  therefore,  be   no               gain  saying the fact that  immediately  after               the  death  of  Md.   Oomer  his  estate   was               inherited   and   run   by   combination    of               individuals who had pooled their resources for               the common purpose of earning income.  " And the High Court has observed               The  opposition was apparently to the  persons               to  be  appointed  receivers and  not  to  the               continuance of the business or to the unity of               control that was necessary.  Noorullah himself               had realised that when he applied earlier  for               the  appointment of receivers to  conduct  the               business   among   other   things.     Despite               Noorullah’s opposition when Luthfunnissa asked               for  the  continuance  of  receivers  in   her               application No. 1162 of 1943, the existence of               the  desire  of all the  co-sharers  including               Noorullah for the continuance of the  business               with  proper  persons to take  charge  of  the               business under the orders of court was  clear.               That  intention  was  material  on  which  the               departmental  authorities  and  the   Tribunal               which agreed with them could find that the co-               sharers  did  constitute  an  ’association  of               persons’.  " From  the  finding of the Tribunal it is  obvious  that  the business  was such that it was not capable of  division,  it being  the  manufacture  and  sale  of  "  Beedies  "  of  a

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 7  

particular-  brand and the finding of the Tribunal was  that the business was carried on with the consent of the parties. On  this finding it has to be decided whether  the  business was  the business of an " association of persons."  and  its profits are assessable as such ? The contention of counsel for the appellant was (1)  that on the death of Md.  Oomer his estate including  the business devolved upon his heirs in specific 519 shares;  and (2) there was no consensus of  opinion  between the  heirs  which is shown by the fact  that  the  appellant filed  an  application to sue in forma pauperis  and  before that  application  could  be  decided  the  widow  sued  for partition and even though receivers were appointed objection was   taken  by  the  appellant  to  the-’  appointment   of receivers.   But these facts do not assist the case  of  the appellant.  As has been said above, the business was in  the first instance carried on by the widow and Dawood on  behalf of  the heirs of Oomer and subsequently when the suits  were brought  none  of the parties wanted to break the  unity  of control  of  the business nor its continuity and it  was  of such  a nature that it could not be carried on without  such consensus  and  therefore  the  receivers  carried  on   the business.  On these findings the High Court has rightly come to  the  conclusion that the business was a business  of  an association of persons. This  Court in Commissioner of Income-tax, Bombay v.  Indira Balkrishna  (1)  considered  the  question  as  to  what  an association  of persons means.  The test laid down in  three cases: In  re B. N. Elias & Others  (2);  Commissioner  of Income-tax  v.  Laxmidas Devidas and Another (3) and  In  re Dwarkanath  Harischandra  Pitale (4) was  accepted  by  this Court  as  correctly  laying  down  the  crucial  test   for determining  what is an association of persons and  that  in each   case  the  conclusion  has  to  be  drawn  from   the circumstances.  In the first case the test was laid down  as applying  to  combinations of individuals who  were  engaged together  in  some joint enterprise but not  constituting  a partnership.   Such a combination of persons formed for  the promotion of a joint enterprise banded together as if  they were  "  coadventurers  " it was held  would  constitute  an asssociation  of individuals.  In the second case, that  is, Commissioner  of Income-tax v. Laxmidas Devidas and  Another (3)  Beaumont,  C.  J.,  at p. 589 laid  down  the  test  as follows:-               " In my opinion, the only limit to be  imposed               on    the   words   ’other   association    of               individuals’ is               (1)   [1960] 3 S.C.R. 513.               (2)   [1935] 3 I.T.R. 408.               67               (3)   [1937] 5 I.T.R. 584.               (4)   [1937] 5 I.T.R. 716,               520               such  as naturally follows from the fact  that               the  words appear in an Act imposing a tax  on               income,   profits  and  gains,  so  that   the               association must be one which produces income,               profits  or  gains.  It seems to  me  that  an               association   of  two  or  more  persons   for               acquisition of property which is to be managed               for  the purpose of producing income,  profits               or   gains  falls  within  the  words   ’other               association of individuals’ in s. 3; and under               s.   9   of  the  Act,  the   Association   of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 7  

             individuals  is the owner of the property  and               as such is assessable." In that case it was also held that the fact that one of  the assessees was a minor during the year of the assessment  did not  affect the question.  In In re Dwarkanath  Harischandra Pitale  (1)  the  assessees were  two  brothers  who  became entitled  to certain house properties as tenants  in  common and  held  and managed the properties as  such  and  derived profit therefrom.  It was held that though the assessees  in the  first  instance did not constitute  an  association  of individuals, they became so when they elected to retain  the property and managae it as a joint venture producing income. The  test  there  laid down was that as soon  as  there  was election  to  retain the property and manage it as  a  joint venture  the  persons so electing became an  association  of individuals.  The Rangoon High Court in The Commissioner  of Income-tax, Burma v. M. A. Baporia and Others (2) also  laid down  the same interpretation of the words " association  of individuals ". That was a case,, of Mohammedan co-heirs  and it was held that by merely inheriting a share of property no person can become a member of an association of  individuals unless  there  is some forbearance or act upon his  part  to show that his intention and will accompanied the new status, that is, an association of individuals.  One of the co-heirs in  that case was appointed an agent to realise  the  income from the properties left to the co-heirs by their father and mother  under  Mohammedan  Law  and  that  was  held  to  be sufficient to constitute them an association of individuals. (1) [1937] 5 I.T.R. 716. (2) [1939] 7 I.T.R. 225. 521  It is unnecessary to refer to other cases.  Taking the test as  laid down by this Court in Indira Balkrishna’s case  (1) it appears to us that the appellant and other co-heirs  were rightly  assessed as an association of persons.  No doubt  a suit  for partition had been filed which was preceded by  an application made by the appellant to sue in forma  pauperis, but the suit in reality was for ensuring the proper  conduct of  the  business and not its  discontinuance.   During  the period that the suit was pending and even before that, i.e., after the death of the father the business was carried on by the  consent of all parties as one unit as indeed it had  to be,  because it had to be carried on as one unit with  unity of   control  and  therefore  the  co-heirs  did   form   an association of persons within the meaning of s. 3 of the Act. Counsel for the appellant relied on S. C. Mazumdar,Receiver, Trigunait  Brothers’  Estate v. Commissioner  of  Income-tax (2).   That was a case of persons who formed a joint  family being  governed  by the Mitakshara School of Hindu  Law.   A suit  for  partition  was filed and the  court  appointed  a receiver  and  a  preliminary  decree  was  passed  but  the receiver  was continued in regard to certain portion of  the property   and  the  income  was  assessed  by  the   taxing authorities as the income of an association of persons.   It was held that the income from property could not be taxed as such  because  the shares of the parties were  definite  and ascertainable.  The amount paid by the lessees could not  be taxed  in  a  lump sum as being the profits  of  a  business carried  on by an association of persons and the  assessment was, therefore, made in accordance with the provisions of s. 9(3).  It was also held that the assessees were not carrying on  a  trade  or  business  themselves  and  there  was   no association of persons as contemplated by the Act.  But that case  can be of no assistance in the decision of the  matter

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 7  

now  before  us.  The income to be assessed  there  was  not income  of  any business carried on by or on behalf  of  the assessees and it was held that letting out property was  not a trade or business.  With regard to the income received  by the receiver (1) [1960] 3 S.C.R. 513. (2) [1947] 15 I.T.R. 484. 522 who  employed contractors to carry on the business of  coal- cutting  and  raising it on the pit bead, it was  held  that that was not the income of an association of persons on  the ground  (1)  that  the receiver was  in  possession  and  he employed  contractors for coalcutting and raising  of  coal; (2)  that  the assessees had no hand in the  business  which produced   royalty   and   (3)  that   the   assessees   had disassociated  themselves  from each other because  of  this partition  suit.   In  our opinion the case  so  far  as  it relates to the carrying on of the business and in so far  as it  is  contrary to the opinion expressed by this  Court  in Indira  Balkrishna’s  case (1), is  not  correctly  decided. Another  case relied upon by the counsel for  the  appellant was  Buldana District Main Cloth Importers’ Group,  Khamgaon v.  Commissioner of Income-tax, Nagpur (2).  In that case  a certain  group of persons were directed to import  cloth  in the  district and had to work a scheme for the  distribution and  sale  of cloth which had been evolved by  the  District authorities.   That  was held not to be  an  association  of persons.  It appears that although they were appointed as  a group of importers, all of them did not participate in  that scheme during the entire period.  There were changes in  the personnel  of the group from time to time and there  was  no compulsion  to work the scheme.  On these facts it was  held that  the  group did not agree to carry on the  business  or share  the  profits.  That case must be taken to  have  been decided on its own facts and does not in any way affect  the meaning  of  the phrase " association of  persons."  Counsel also   relied   on  Khan  Bahadur  M.  Habibur   Rahman   v. Commissioner  of Income-tax, Bihar & Orissa (3 ) in which  a waqf  deed was executed by which the assessee dedicated  the income  with  ultimate benefit to the poor  and  constituted himself  the sole mutwali of the trust.  The  deed  provided that the beneficiaries should be benefited concurrently  and in  the  same  proportion.  It was held that  s.  41(1)  was inapplicable and the assessee should, therefore, be taxed on the basis of profits falling to the share of (1) [1960] 3 S.C.R. 513.   (2) [1956] 30 I.T.R. 61. (3) [1945] 13 I.T.R. 189. 523 each  beneficiary  and  not  on the  footing  that  all  the beneficiaries  constituted an association of persons.   Fazl Ali C. J. (as he then was) there observed at p.   194:-               " It seems to me therefore that the finding of               the  Tribunal that there were only 24  persons               who were entitled to share the profits in  the               accounting year and that they were entitled to               equal shares therein must be accepted.  As  it               does not seem to have been contended that  the               assessee  had any other relations  than  those               enumerated  by  the  Tribunal  who  would   be               entitled to share the profits, it is  academic               to  discuss whether the various categories  of               persons referred to by the Appellate Assistant               Commissioner  of Income-tax were  included  in               the term ’family’ or not."

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 7  

On this ground the income was not assessed as the income  of an association of persons and that case "-as also decided on its own facts. The question in the present case is as to what income was to be taxed.  The income was the income of a business which was carried  on as a single business by the consent of  all  the parties.  The mere fact that a suit was pending at the  time for the administration of the estate of the deceased or  for the separation of the shares of the co-heirs does not affect the incidence of taxation in this case, because the business was carried on, as said above, as one business with  unitary control  and by the consent of the parties.  The High  Court was  right in holding that the income was assessable  as  an income of an association of persons. The  appeals must, therefore, be dismissed with costs.   One hearing fee.                            Appeals dismissed. 524