23 April 1970
Supreme Court







DATE OF JUDGMENT: 23/04/1970


CITATION:  1970 AIR 1707            1971 SCR  (1) 340  1970 SCC  (2) 139  CITATOR INFO :  R          1973 SC2369  (10)  R          1977 SC2103  (15)

ACT: Income-tax Act, 1922, s. 41(1)-Receivers appointed by  Court to  ,carry on business of dissolved firm-Erstwhile  partners acquiescing  in carrying on of business by  receivers  and receiving  from  them their shares of  the  profits  earned- Assessment of income of business whether to be on  erstwhile partners as in individuals or as constituting an association of  individuals-Receivers whether an association of  persons Nature of liability of receivers under s. 41(1).

HEADNOTE: The  appellant  was a partnership firm constituted  under  a deed April ’20, 1955.  On a suit for dissolution being filed by one of the partners and an application being made for the appointment  of  a  receiver,  the  Court  appointed   three ’receivers  two of whom were the erstwhile partners  of  the firm  and  the  third an advocate.   The  Court-ordered  the receivers  to  continue  the business  for  the  purpose  of winding  up with the power to realise the out standings  and discharge  the  dues of the firm.  The profits  were  to  be divided  among  the  parties  according  to  terms  of   the partnership deed dated April 20, 1955.  The business yielded profits  in  the assessment years 1958-59  and’1959-60.   In response  to  notices issued to the Income-tax  Officer  the receivers  filed  returns  for  these  years  showing  ’nit’ income.  They showed the profits in section D of the return. They claimed that the income should be assessed in the hands of  the beneficiaries as they were already assessees  having other  sources of income.  The Income-tax  officer  rejected the contention and held that the business was carried on  by an  ’association  of persons’ and, as such  no  question  of assessing  the individual partners on their share of  income at the rates applicable to them would arise.  The  Appellate Assistant  Commissioner confirmed the order ,of the  Income- tax  Officer.  The Tribunal took the opposite view  but  the High  Court in reference answered the question  referred  to it,  namely  whether the income "could be  assessed  on  the



receivers as a association ,.of persons under s. 10 or under s. 41 of the Act", in favour of the revenue.  In appeals  to this Court by certificate, HELD  :  (i) The fact that there were  three  receivers  was wholly irrelevant for the purpose of assessment and did  not make  them  an  association of receivers.   In respect  of business profits, all assessments of tax is done under s.  3 read  with s. 10 of the Act.  Section 3 imposes  the  charge and s. 10 provides for determining the profits and gains  of business.   Section 41 does not impose any  separate  charge but  only  empower the Revenue to levy and collect  tax  due from a person or persons, from his or their representative. The primary liability to pay the tax in the present case was that  of the real owners of the business i.e. the  erstwhile partners  of  the  firm.   There was  thus  no  question  of assessing  the receivers as an association of persons.   The receivers  were  not liable "under s. 10 or s.  41  ,of  the Act";  their  liability arose under s. 41 read with  s.  10. [343 E-H; 344 A-B] (ii)  The  control  and management of the  receivers  was  a unified  one. The receivers had joined in a  common  purpose and  they  acted jointly.  When they did so  they  acted  on behalf of the persons who were the owners of the, business. The  receivers  did not and could not have  represented  the individual  interest of the various owners of the  business; that 341 would  have resulted in chaos.  The profits Were  earned  on behalf  of the persons who had a common interest created  by the  order  of  the  court  and  were  on  that  account  an "association of persons". [345 B-C] The fact that one of the erstwhile partners bad objected  to the  continuance  of  the partnership could not  lead  to  a contrary  conclusion.   All  the  owners  of  the   business including the person who objected to the continuance of  the business  were  given month by month some amounts  from  the proceeds  of the business and none of them had  declined  to receive  the same.  They were therefore an  "association  of persons" within the meaning of s. 3 of the Act having joined together  for  the purpose of producing income,  profits  or gains. [345 G-H; 347 F] Commissioner   of  Income-tax,  Ahmedabad,   v.   Balwantrai Jethalal  Vaidya  Qrs.  34  I.T.R.  187,  C.R.  Nagappa   v. Commissioner of Income-tax 73 I.T.R. 626, In re B. N.  Elias JUDGMENT: 42 I.T.R. 115, referred to. Commissioner  of Income-tax, Bombay v. Indira Balkrishna  39 I.T.R. 546 and Commissioner of Income-tax, Poona v.  Buldana Distt.  Main Cloth Importers Group, 42 I.T.R. 172, applied.

& CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  294  and 295 of 1967. Appeal  from the judgment and order dated November 30,  1965 of  the  Madras  High  Court in Tax Case  No.  215  of  1962 (Reference No. 120 of 1962). M.   C.  Chagla, K. Srinivasan and T. A.  Ramachandran,  for the appell it (in both the appeals). B.   Sen, G. C. Sharma and B. D. Sharma, for the  respondent (in both the appeals). The Judgment of the Court was delivered by Hegde,  J. These companion appeals by certificate  under  s. 66A(2)  of  the Indian Income Tax Act, 1922 (in  short  ’the



Act’)  are directed against the decision of the Madras  High Court  in  a  tax  reference under S. 66  (1)  of  the  Act, relating to the assessment years 1958-59 and 1959-60. Messrs.   N. V. Shanmugam and Co., a firm, was  carrying  on business  in the manufacture and sale of snuff under a  deed of  partnership dated April 20, 1955.  Its partners were  S. P. Ramiah Nadar, Murugavel Nagar and Shanmughavel Nadar.  S. P.  Mohan, a minor had been admitted to the benefits of  the partnership, his share in the net profits being 1/6th.   The deed of partnership provided that the partnership could  not be  dissolved before August 3 1, 1955.  But it was  open  to the  partners  to continue the partnership or enter  into  a fresh  partnership  on  fresh  terms  and  conditions.    On September  17, 1956, Ramiah Nadar filed a suit in  the  city Civil Court, Madras for the dissolution of the partnership 2Sup. Cl/70 8 342 with effect from August 31, 1956 and for taking of accounts. He  also applied for the appointment of a receiver  to  take charge  of the business.  On September 21, 1956,  the  Court appointed  three receivers two of whom were the partners  of the  firm  namely Ramiah Nadar and Murugavel Nadar  and  the third  was an Advocate by name Ram Mohan.  The  business  of the  firm  had  been  stopped  from  September  1,  1956  to September  21, 1956.  The Court directed the  receivers  "to reopen  and  conduct the snuff business for the  purpose  of winding  up,  with powers to realise  the  outstandings  and discharge  the  dues of the firm" subject to  the  following among other terms.               Clause  4  : The receivers can  carry  on  the               business of the partnership normally.               Clause  6 : All parties to have access to  the               books   of  the  firm  and  to  the   business               premises.               Clause  7  : All parties are entitled  to  get               information  relating  to the conduct  of  the               business from the receivers.               Clause 8 : The profits if any earned from 1-9-               1956  will be treated as an asset of the  firm               subject  to be divided between the parties  in               the manner set out in paragraph 10 of the deed               dated  20-4-1955.  The receiver  or  receivers               shall not be entitled to any share in the pro-               fits for the management.               Clause 9 : The receivers will pay every  month               Rs.  1,5001’ to plaintiff, Rs. 1,5001- to  the               1st defendant, Rs. 750/- to 2nd defendant  and               Rs. 750/- to 3rd defedant by his guardian from               November  1,  1956 (owners  of  the  dissolved               firm). Sometime later the court appointed a Commissioner for taking the accounts of the’ firm and for arranging the sale of  the business as a going concern; but no sale took place.  In the assessment  year 1958-59, the business yielded a  profit  of Rs.  93,739/-. in the assessment year, 1959-60, there was  a profit  of  Rs. 1,54,393/In response to a  notice  from  the Income-tax  Officer, the receivers filed "nil"  returns  but showed  the profits earned in the businezs in Section  D  of the  return.   But they asserted that the income  should  be assessed  in  the  hands of the beneficiaries  as  they  are already  assessees  having  other sources  of  income.   The Income-tax Officer rejected that contention.  He came to the conclusion   that  the  business  was  carried  on   by   an ’association  of  persons’  and  as  such  no  question   of assessing  the individual partners on their share of  income



at tile rate applicable to them would arise, as contended by 343 the   receivers.   The  Appellate   Assistant   Commissioner rejected the appeal of the assessees and confirmed the order of  the  Incometax  Officer; but on a  further  appeal,  the Tribunal  came  to the conclusion that  the  profits  earned should  be  assessed to tax in the hands of  the  individual partners at the rates applicable to, them.  At the  instance of  the  Commissioner of Income-tax,  Madras,  the  Tribunal submitted  the following question under s. 66(1) of the  Act for the opinion of the High- Court :               "Whether the incomes of the business in  snuff               could  be  assessed  on the  receivers  as  an               association of peisons under s. 10 or under s.               41 of the Act." The  High  Court  answered that question in  favour  of  the Revenue. The  real point in controversy between the Revenue  and  the assessees  is  whether the profits earned  in  the  business should be considered as profits earned by an "association of persons’," or whether it should be considered as having been earned by individuals.  The receivers appointed by the court were  merely the representatives of the real owners  of  the business  i.e.  the  erstwhile partners of  the  firm.   The primary  liability to pay the tax due was, that of the  real owners.   The  tax  may be levied  and  recovered  from  the Receivers  under  s.  41 ( 1 ) of the Act.   To  borrow  the expression  from  the Income-tax Act, 1961,  they  are  only representative  assessees.  The fact that there  were  three receivers  did  not makethere an association  of  receivers. The  three  receivers jointly represented the  real  owners. The circumstance that there were three receivers was  wholly irrelevant for the purpose of the assessment.  There was  no question  of assessing the receivers as an  "association  of persons".  The real question is whether the Persons whom the receivers   represented  constituted  an   "association   of persons".   Further  in respect  of  business  profits,-,all assessment of tax is done under s. 3 read with s. 10 of  the Act.   Section 3 imposes the charge and s. 10 to the  extent relevant for our present purpose provides that tax shall  be payable by the assessee under the head "Profits and gains of business"  in  respect of the profits or gains  of  business carried  on by him subject to the allowances  allowed  under sub-s. (2) of that section.  Section 41 empowers the Revenue to  levy the tax that could-have been levied on  the  person who  earned  the  profits  on  one  or  the  other  of   his representatives  mentioned in that section and  recover  the same from that representative "in the like manner and to the same  amount as it would be leviable upon  and  recoverable" from   the  person  on  whose,  behalf  such  profits   are. recoverable  and all the provisions of the Act  shall  apply accordingly.   Section  41 of the Act does  not  impose  any separate  charge.  It only empowers the Revenue to levy  and collect  a  tax due from a person or persons,  from  his  or their representative.  Hence there-. 344 is no question of either the receivers being an "association of  persons" or their being liable "under s. 10 or s. 41  of the Act".  The liability of the receivers arose under S.  41 read  with  S. 10.  The Tribunal wanted the opinion  of  the High  Court on the question whether the profits in  question should be considered to have been earned by an  "association of  persons" or by individuals.  We shall proceed to  answer that question. Mr. M. C. Chagla, learned Counsel for the assessee contended



that the liability of receivers is co-extensive with that of the  beneficiaries  and cannot in any case be  a  larger  or wider  liability.  If the assessment is made on  a  receiver whatever  the  nature of the profit, whatever  the  mode  of compuation,  his liability to pay tax must be determined  in accordance with s.41 of the Act; that section is  mandatory; the  tax  payable by him on the profits earned can  only  be ascertained  in accordance with the special provisions  laid down  in that section; it is not open to the  department  to ignore  the provisions of s.41 and levy tax on receivers  in the  same  way  as  on assessee  who  does  not  fulfil  the character  of a receiver.  According to the Counsel when  an assessment  is made under s.41 of the Act, it must  be  done under  one of the heads mentioned in Chap.  III of  the  Act and  the provisions laid down with regard to computation  of the  income-tax must be carried out; Section 41.  will  come into  play  after  the incomes has  been  so  computed.   In support of this contention, he relied on the decision of the Bombay  High Court in Commissioner of Income-tax,  Ahmedabad v. Balwantrai Jethalal Vaidya and ors.(1) which decision has been approved by this Court in C. R. Nagappa v. Commissioner of  Income Tax. ( 2 ) Proceeding further the  Counsel  urged that the assessment of the receivers should have been on the same basis as the erstwhile partners of the firm would  have been  assessed  in  respect  of  the  profits  in  question. According  to him, the business in question could  not  have been conducted by the erstwhile partners as an  "association of  persons".  He urged that the erstwhile partners  of  the firm  were fighting amongst themselves; some of them  wanted to  carry on the business while one of them wanted to  close down  the  same.  Hence they could not have carried  on  the business  as an "association of persons".  He urged that  an "association of persons" as used in s.3 of the Act means  an association in which two or more persons voluntarily join in a 41 common  purpose" or "common action".  He further  urged that in a business said to be carried on by an  "association of  persons",  there must be unity of control and  unity  of management;  as no such unity existed amongst the  erstwhile partners  of the firm, it cannot be said that the  receivers represented an "association of persons". (1)  34, I.T.R. 187. (2) 73, I.T.R., 626. 345 We  are unable to accede to the contentions of  the  learned Counsel  for  the  assessee.   It is  not  denied  that  the business  was  carried  on by the  receivers  on  behalf  of erstwhile partners of the firm and that considerable profits were  earned  from  the  business.   The  control  and   the management  of  the  business  was  in  the  hands  of,  the receivers.   That control and management was a unified  one. The  receivers had joined in a common purpose and they  actd jointly.   When  they  did so they acted on  behalf  of  the persons who were the owners of the business.  The  receivers did  not  and  could not  have  represented  the  individual interest of the various owners of the business.  If they had done  so there would have been chaos in the  business.   The profits to which those owners lay claim and which they  were not   averse  to  pocket,  were  earned  on  behalf  of   an "association of persons".  The profits were earned on behalf of the persons who had a common interest creatd by the order of the Court and were on that account of an "association  of persons".  The existence of specific or defined interest  in the  profits  did not make the earning any the  less  by  an ’association of persons’.  Liability to tax depends upon the earning  of  profits  by a unit and not  upon  the  ultimate



division  of  the profits.  The expression  "association  of persons" is not defined in the Act.  At one stage, there was conflict of judicial opinion about the true meaning of  that expression.   That  conflict can now be said  to  have  been settled  by some of the decisions of this Court to which  we shall refer presently. In   Commissioner  of  Income-tax,  Bombay  v.  Indira   Bal krishna(1)  this  Court  accepted the  observations  of  Sir Harold  Derbyshire C.J. in In re B. N. Elias and  ors.  (2). that the words " associate" means "to join in common purpose or  to  join  in  an  action".   Therefore  "association  of persons" as used in s. 3 of the Act means an association  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.  It  is  true that   in  the  instant  case  before  the  receivers   were appointed,.  one of the erstwhile partners objected  to  the continuance of the partnership.  But there is nothing in the record  to show that he objected to the continuance  of  the business.  All the same we shall assume that he did not want at that stage that the business should be continued.  But in fact  business was continued in pursuance of the  orders  of the  Court.   All the owners of the business  including  the person who objected to the continuance of the business  were given, month by month, some amounts from the proceeds of the business.   It  was not said that any of  them  declined  to receive the same.  That means all of them acquiesced in  the continuance of (1) 39, I.T.R. 546. (2) 3, I.T.R. 408. 346 the business.  Each one of the assessees wants to share  the profits earned on behalf of all of them but when it comes to the  question  of  paying tax, they want to  deny  that  the business was conducted on behalf of all of them.  It is true considerations  of  equity are  irrelevant  in  interpreting taxing  provisions  but while considering the  question  who carried  on  a  business,  the  course  of  conduct  of  the concerned  parties  is relevant.  On the  facts  proved,  it must’ be held that in law the erstwhile partners of the firm carried on the business through their representatives. In  Mohamad Noorullah v. C.I.T. Madras(1) this Court had  to consider  whether  the assessment in that case  was  rightly made  on  an  "association  of  persons".   Therein,  0,   a Mohamaden  who was carrying on the business  of  manufacture and sale of beedies of a particular brand, died intestate on December  17,  1942 leaving as his heirs, N, a  son  by  his predeceased  wife, L his widow and his four children  by  L. The  widow  L and one D carried on the  business  after  the death of O.N, through his next friend, applied for leave  to sue  for  partition  in forma  pauperis  and  pending  these proceedings on March 17, 1943, two advocates were  appointed as joint receivers of all the properties of 0, by consent of all  the  parties.  The consent on behalf of the  minor  was given  by his next friend.  The widow L filed  another  suit for   partition  on  May  10,  1943  but  applied  for   the continuance   of  the  joint  receivers.   N   opposed   the application on the ground that h.-. wanted different persons to  be appointed as receivers.  By an order dated  May  25, 1943,  the  Court  ordered  the  continuance  of  the  joint receivers.   The  receivers  continued  in  charge  of   the business  till November, 1946 when the business was  put  up for  sale by auction and was purchased by N. The  Income-tax Officer  assessed  the  profits  of  the  business  for  the



calendar years 1943-46 in the, hands of the receivers as the income  of  an "association of persons"  consisting  of  the heirs of O. The Appellate Assistant Commissioner as well  as the  Tribunal upheld the finding of the Income-tax  Officer. On  a  reference under s.66(1) of the Act,  the  High  Court agreed with the view taken by the authorities under the Act. This  Court upheld the view taken by the High Court.   This decision was tried to be distinguished by Mr. Chagla on  the ground  that in that case all the parties had  consented  to the appointment of the receivers.  None of the heirs of  the deceased owner of the business wanted to break the unity  of the business or its continuity and the business was of  such a nature that it could not be carried on without  consensus; therefore, the continuance of the business by the  receivers was  rightly  considered as continuance of business  by  the heirs  of the deceased.  According to the Counsel  such  was not  position in the present case.  For the reasons  already stated, we (1)  42, I.T.R. 115. 347 see  no merit in that contention.  We have earlier  come  to the conclusion that the business was continued with  consent of all the owners.  Hence for the purpose of this case it is not necessary to go into the  question as to what would have been the position it the business  had    been     continued without the consent of all the owners.  The  facts  of  this case directly fall within the rule laid down by this   Court in Commissioner of Income-Tax, Poona v. Buldana Distt.  Main Cloth Importers Group(1).  The facts of that case were :  In 1945,  the Deputy Commissioner of Buldana evolved  a  scheme for the distribution of cloth in his district and, with  the sanction  of the C.P. Government appointed a group  of  four persons as sole agents for the import of cloth from mills in various  places  in  India  and  for  its  distribution   to retailers.   For different periods the group which  imported cloth  was differently constituted.  H. & Co., which  was  a common member maintained the books relating to the business. Every  time  there was a change in the constituents  of  the group,  a  separate  set of books  was  maintained  and  the profits  from  those enterprises were  divided  between  the various  persons who formed the group at the material  time. The   Appellate   Tribunal   found   that   the   import,and distribution  of  cloth  was  done on  a  joint  basis,  the purchasers  were  joint, so were the sales and  the  profits were  ascertained  on  a joint basis  and  then  distributed according  to the capital contributed by each member of  the group.   This Court held that the group was an  "association of persons" and could be assessed on its profits as such  to income-tax and excess profits tax.  It further held that  it made no difference that the business was carried on  because the  Deputy Commissioner of the district had  appointed  the members constituting the group to import and distribute  the cloth.  Therein the members of the group did not voluntarily join  the  group.   They were put  together  by  the  Deputy Commissioner  and  asked to act together,  which  they  did. Similar is the position in the present case.  For the reasons mentioned above, our answer to the question referred is that the profits in question were earned from  a business carried on by an "association of persons". In the result these appeals fail and they are dismissed with costs.  One hearing fee. G. C.                                    Appeals dismissed. (1) 42 I.T.R. 172. 348