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Petitioner: MEERA AND COMPANY VS Respondent: COMMISSIONER OF INCOME-TAX
Court Name: Supreme Court of India Judge(s): G. T. Nanavati, B. P. Jeevan Reddy, Suhas C. Sen Title: MEERA AND COMPANY vs COMMISSIONER OF INCOME-TAX Case No.:Civil Appeals Nos. 1297-1301 of 1980, Civil Appeals Nos.1664 to 1666 of 1986,
JUDGMENT
Reported As: 1997 PTD 1787 Result: Order accordingly Judgment JUDGMENT ' SUHAS C. SEN, J.---This is an appeal against an order passed by the Division Bench of the Punjab and Haryana High Courts (see (1979) 120 ITR 564 disposing of an income-tax reference relating to assessm ents for the assessm ent years 1963-64 to 1967-68. ' The following questions of law had been referred to the High Court by the Income-tax Appellate Tribunal (at page 565) "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that Meera & Co. Is a body of individuals and is assessable as such? (2) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessm ent of the body of individuals identified as Meera & Co. Should be made under section 4 read with section 2(31)(v) and not under sections 160, 161 or 166?" ' The High Court has given a brief summary of the relevant facts as under: ' Shari Prem Narain, an individual, carried on business under the name Meera & Co., at Ludhiana. He died .Intestate on August 25, 1962, ,70 survived by his mother, his widow and three minor children. All the assets of the deceased including the business styled as Meera & Co. Devolved on his five legal heirs., The mother of the deceased relinquished her interest in the assets of the deceased against a lump sum payment. For the purpose of these references, we are concerned with the widow and the three minor children of the deceased. The business of Meera & Co. Was continued as single unit in the same name by Smt. Krishna Gupta, widow of the deceased, obviously on her behalf and on behalf of all the three minor children as their guardian. The accounts were maintained in the name of Meera & Co. The yearly profits were ascertained and divided. The
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income-tax returns for the assessme nt years 1963-64 to 1967-68 were filed by Smt. Krishna Gupta on behalf of Meera & Co. The status of the assessee was described as "association of persons". These returns reflected the entire income from business previously carried on by Shri Prem Narain, deceased. On January 25, 1968, Smt. Krishna Gupta filed the return under protest and further revised the returns for the assessm ent years 1963-64 to 1966-67, declaring the same income that had been shown in the returns already filed but without specifying the status therein. It was contended that the income from the business should be assessed in equal shares in the hands of the four legal heirs of the deceased. The minor children of the deceased also filed separate returns where the share of profit from Meera & Co. Was included for rate purposes only. The Income-tax Officer did not agree with the altered position taken by the assessee that the income from the business was liable to be assessed in equal shares in the hands of the four heirs of the deceased. He held that the business was for one and common unit and the same was assessable in the status of "body of individuals". The assessee, being dissatisfied with the order of the Income-tax Officer, filed an appeal and the Appellate Assistant Commissioner held that the entire income of the business was assessable in the hands of Smt. Krishna Gupta as a person carrying on business in an individual capacity. The Revenue and the assessee both filed appeals before the Income-tax Appellate Tribunal. The Accountant Member of the Appellate Tribunal found that the business was carried on as an organic unit by Smt. 'Krishna Gupta on her own behalf and on behalf of her three minor children as their natural guardian. On the death of Shri Prem Narain, his estate fell to his legal heirs under section 8 of the Hindu Succession Act as tenants-in-common. The special provisions regarding minors and guardians contained in sections 160, 161 or 166 of the Income-tax Act (hereinafter referred to as "the Act"), shall apply and will override the general provisions contained in sections 4 and 2(31)(v) of the Act. The Judicial Member took a different view. According to him, the entity was liable to be assessed under section- 4 read with section 2(31)(v) of the Act. He repelled the contention of the assessee that the assessment of the minors should have been done under the special provisions meant for representative assessees, i,e,, sections 160, 161 etc. He held that before the assessee could be so treated, he must filter through the charging section 4 read with section 2(31)(v) of the Act and if he cannot do so, he must stay there. In the event of the assessee being a body of individuals, as defined in section 2(31)(v), the question of applicability of sections 160, 161, etc., of the Act did not arise. As the two members of the Appellate Tribunal differed, the matter was referred to a Third Member who agreed with the view taken by the Judicial Member and the appeals of the assessee were consequently dismissed. ' Before the High Court, the contention made on behalf of the appellant was that Smt. Krishna Gupta had two capacities in this matter. She was managing the business of Meera & Co. In her own right as well as a guardian of the minor children. As a guardian-trustee of the minor children, she should have been assessed as a representative assessee in accordance with the provisions of sections 160, 161 and 166 of the Act. Krishna Gupta acted on behalf of the minors in running the business of Meera & Co. Income from the business representing the share of the minors accrued to them or to their guardian representing them. That being the case, the mode of assessment contained in Chapter XV of the Act shall get precedence being special provisions relating to the minors and assessm ent should be made accordingly. It was further contended that the assessm ents could not be made in the status of "body of individuals" which postulates more than one individual. In this case, the business was being managed by Krishna Gupta on her own behalf and also on behalf of the minors. There is no question of assessing the income of the father in the status of "body of individuals". ' The High Court was, however, of the view that the expression "body of individuals" should receive a wide interpretation to include a combination of individuals who have unity of interest (mother and her three minor children) and were actively engaged in the business carried on for the benefit of all
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of them by one of them and, therefore, they would constitute a "body of individuals". In the instant case, on the death of Prem Narain, business under the trade name Meera & Co, passed on to Krishna Gupta and her three minor children. The fact that the minors had no legal capacity to enter into an agreement was irrelevant for determining their status as a constituent in the " body of individuals" in terms of section 2(31)(v), of the Act. In that view of the matter, the High Court answered both the questions in the affirmative and in favour of the Revenue. ' In the appeal before us, it has been contended that in the facts of this case, it could not be said that the mother and three minor children had formed a " body of individuals" and were assessable as a unit. The business profit should have been apportioned and assessed in the hands of each of the heirs of Prem Narain separately and in the status of individual. Secondly, it was contended that the special provisions relating to the minor contained in Chapter XV of the Act will override the general provisions relating to assessment in other parts of the Act. When the income of the firm accrued to the minor, assessm ent should have been done in accordance with the provisions of sections 160. 161 and 166 of the Act . ' We are unable to uphold any of these two contentions . The business of Meera & Co. Was set up by Prem Narain who ran this business as a sole proprietary concern till his death. After his death, the entire business devolved upon his mother, widow and minor children. The mother' s share was bought by the widow and her children and they carried on the business in the name of Meera & Co. The business was carried on as before jointly by the widow on her own behalf as well as on behalf of the minor children. The profits that arose out of the business were a result of the business activities carried on jointly by the mother on her own behalf and also on behalf of minor children. In such a situation, the assessm ents had to be made in respect of the income generated in the business in the status of " body of individuals". ' On behalf of the appellant, it has been contended that "a body of individuals" is an altogether different entity and should not be equated with "an association of persons". The phrase "an association of persons" is well-understood in the Income-tax Act and has been explained in a number of cases. The Legislature is presumed to know the judicial interpretation given to the phrase "association of persons". " Body of individuals" in this background of facts must be held to be some other entity not akin to "association of persons". A board of trustees or a society of persons can be treated as "a body of persons". A group of individuals cannot be treated as "a body of individuals", more so when the group is receiving income from an enterprise not set up by that group. The meaning ascribed to "association of persons" cannot be applied to " body of individuals". ' Before examining this question, we shall notice how the expression "association of persons" had been understood under the Indian Income-tax Act, 1922, over the years. ' Initially, the charge under section 3 of the Indian Income-tax Act, 1922, was on income of "individual, company., firm and other "association of individuals". These words were substituted by section 3 of the Indian Income-tax (Amendment) Act, 1939, by the words "individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or the members of the association individually". Commenting on this charging section, it was observed by Beaumont, C.J. In CIT v. Laxmidas Devidas (1937) 5 ITR 584 (Born.) at page 589 as under; "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'... ' The fact that one of the assessees during the year of assessment was a minor, does not, I think, affect the question... What we have got is the ownership of property by two persons, and the production by that properly of profits of gains."
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' In the case of CIT v. Salem District Urban Bank Ltd. (1940)8 ITR 269, a Bench of three Judges of the Madras High Court took the view that "association of individuals" in section 3 of the Indian Income- tax Act, 1922, would apply even to a corporate body which for the most part was composed of cooperative societies. On behalf of the appellant reliance was placed on the judgment in the case of CIT v. Ahmedabad Mill Owners Association (1939) 7 ITR 369 (Bom.), where it was held that the expression "association of individuals" in section 3 meant an association of human beings. Leach, C. J., considered the opinion expressed in Trustees of Sir Currimabhoy Ebrahim Baronetcy Trust v. CIT (1931) 5 ITC 484 (Born.), preferable to that expressed in the case of Ahmedabad Millowners' Association (1939) 7 ITR 369 (Bom.) and held that "association of individuals" did not mean an association of human beings only. Leach, C. J. Observed. "If a corporate body created by a statute is an individual within the meaning of the section and I hold that it is a cooperative society registered under the Cooperative Societies Act must fall within the same category. It is a corporate body and has perpetual succession. I consider that it is not reasonable to suppose that the Legislature intended that there should be a difference in the meaning of the word ' individual' and. The plural "individuals'. If the word 'individuals' includes a corporation, the words ' association of individual must embrace an association of corporate bodies and, therefore, the assessee is an 'association of corporate bodies' and, therefore, the assessee is an ' association of individuals'." ' Possibly because of this difference of opinion about the meaning of phrase "association of individuals", section 3 of the 1922 Act was amended in 1939 and the charge was imposed on "every individual, Hindu undivided family, a company and local authority, every firm and other association of persons or the partners of the firm or the members of the association of individually". ' This amendment took care of the controversy as to whether the phrase "association of individuals" will take in association of natural and artificial persons or bodies like cooperative societies. Derbyshire, C J. Explained the amended charge in the case, of B. N. Elias, In re: (1935) 3 ITR 408 (Cal), in the following words. "Previous to the year 1924, the words of the section in question 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. Those words ' association of individuals' have to be construed in their plain, ordinary meaning. There is no difficulty about the word 'individuals'. ' Associate' means, according to the Oxford Dictionary, 'to join in common purpose, or to join in an action'. Did these individuals join in a common purpose, or common action, thereby becoming an association of individuals ? In my view, they did. In the first place, they joined together in the purchase of this property on the 9th January, 1920. In the second place, they have remained joint as owners of this property from the date of the purchase down to the present time. Thirdly, they have joined together, as the power of attorney show, for the purpose of holding this property and of using it for the purpose of earning income to the best advantage of them all. Under these circumstances, it seems to me that looking at the position and construing the word of the Act in their ordinary common meaning, the four persons named are an 'association of individuals. In arriving at the conclusion, I am fortified by the words of Lord Justice Cotton in the case of Smith v. Anderson (15 Ch. 147, at page 282). There the learned Lord Justice is discussing the meaning of the word 'association' as used in section 4 of the Companies Act of 1862. The word occurs along with the words 'company of partnership'. Cotton, L. J., says at page 282: 'I do not think it very material to consider how far the word association' differs from company of partnership, but I think we may say that if ' association' is intended to denote something different from a company of partnership, it must be judged by its two companions between which it stands, and it must denote something where the associates are in the nature of partners. It seems to me (not that I think it material) that
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it might have been intended to hit the case which we have frequently seen, of a number of persons or a number of firms joining themselves together for the purpose of carrying on a particular adventure in order to make gain by it'. Then he goes on to describe instances of that. ' In my view these persons have joined themselves together and remained joined together for the purpose of buying, holding, and using that property 'Norton buildings', in order to make gain by it . In so doing they have become and were, at the time of this assessment, an 'association of individuals' within the meaning of section 3 of the Indian Income-tax Act.' ' Costello, J., in his concurring judgment, observed. "Mr. Banerji was at very great pains to demonstrate to us that the combination of individuals with which we are concerned could not properly be described as partnership and he emphasised the fact that they were co-owners of the property which is known as 'Norton building'. I have no doubt whatever that Mr. Banerji was perfectly justified and correct in inviting us to take the view that this was not a partnership but it seems to me bearing in mind the juxta position which I have mentioned, that although these four persons did not constitute a body which was the same as partnership it was in many respects similar to a partnership and was approximate to a partnership and 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 partnerships within the definition of partnership either as originally given in the Contract Act or as now given in section 4 of the Partnership Act." ' Costello, J.'s observation 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 partnerships aptly sums up the position. Bodies or associations which were neither companies nor partnership in law were sought to be taxed if the persons or individuals constituting the body or the association combined to engage in an activity to produce income. ' It is also important to note that in that case Costello. J. Was invited to give a general definition of the expression "association of individuals". He observed. "Mr. Banerji invited us to take upon ourselves the difficult but not indeed impossible task of laying down a general definition of the expression 'association of individuals'. In my opinion that is not desirable from any point of view wilikuever. Each case must be decided upon its own peculiar facts and circumstances. When we find, as we do find in this case, that there is a combination of persons formed for the promotion of a joint enterprise banded together if I may so put it, co-adventurers to use an archaic expression, then I think no difficulty whatever arises in the way of saving that in this particular case these four persons did constitute an 'association of individuals' within the meaning of both section 3 and section 55 of the Indian Income-tax Act, 1922." We were also referred to the case of Re: Keshardeo Chamria (1937) 5 ITR 246 (Cal.) and it was contended that in a family business, a situation may arise where some members of the family carry on the business jointly. From that it does not follow that the members of the family must be assessed as an ' association of persons'. In that case, there was a partition suit followed by appointment of a Commissioner for partition for dividing the properties among the members of the family. Panckridge, J., observed that the status of the members of a Mitakshara family changed after the preliminary decree of partition. He went on to observe. ' The members of such a family appear to me to be in the same position as the members of a Dayabhaga family, and it has never been suggested as far as I know that members of such a family cannot be individually assessed in respect of their shares." ' It was held in that case that the members of the family could not be treated as an "association of persons". It is to be noted that in that case no business was carried out jointly by two individual members of the family, but after partition the members of the family held properties as tenants in- common like the members of a Dayabhaga family.
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' In the case of CIT v. Indira Balkrishna (1960) 39 ITR 546, this Court held that "association of persons" meant an association in which two or more persons join in a common purpose of common action. As the words occurred in a section which imposed a tax on income, the association must be one the object of which was to produce income, profits or gains. In that case, the co-widows of a Hindu governed, by the Mitakshara law inherited his estate which consisted of immovable properties, shares, money lying in deposit and a share in a registered firm. The Appellate Tribunal found that they had not exercised their right to separate enjoyment and that except for jointly receiving the dividends from the shares and the interest from the deposits, they had done no act which had helped to produce income. This Court held that the co-widows succeeded as co-heirs to the estate of the deceased husband. It was held that since the widows had an equal share in the income from immovable properties, section 9(3) of the Indian Income-tax Act, 1922, will apply. So far as other incomes were concerned, it was held. "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 section 3 of the Indian Income-tax Act." ' The meaning of "an association of persons" was also examined by this Court in the case of G. Murugesan & Brothers v. CIT (1973)88 ITR 432. It was held in that case that an association of persons could be formed only when two or more individuals voluntarily combined together for certain purposes. Volition on the part of the members of the association was an essential ingredient. It. Was further held that even a minor could join "an association of persons" if his lawful guardian gave his consent. The income in that case arose under two heads-house property and dividends from shares. The question before this Court was whether the dividend income should be assessed, in the hands of an association of persons or individuals. One Sinnamani Nadar executed a settlement-deed in favour of his four grandsons. The property covered by the settlement-deed comprised a house property which had been let out and some shares. The donees were to enjoy the income of these properties duffing their lifetime. Thereafter, the properties were to devolve on their children. In that case, it was pointed out that the income-tax return was filed in the status of association of persons prior to the assessment year 1959-60. For the years 1959-60 to 1962-63, the returns were submitted as individuals specifically stating that the donees were not functioning as an association of persons. ' In the case of Muhammad Noorullah v. CIT (1961) 42 ITR 115 (SC), one Oomer Sahib used to carry on business of manufacture and sale of Spade Clover brand bee dies. After his death his minor son, Muhammad Noorullah, and his widow, Lutfunnisa Begum, and four children by her who were all minors at the date of the death of Oomer Sahib, carried on the business. Noorullah through his next friend applied to sue in forma pauperism and during the pendency of, those proceedings, two Advocates of the High Court were appointed joint receivers of the properties of the deceased on March 17, 1943. On May 10, 1943, the widow, Lutfunnisa, filed a suit for partition and also applied for the continuance of the joint receivers. 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 noted that none of the parties wanted to break the continuity of the business after the death of Oomer Sahib. The joint receivers continued the business till November 25, 1946, when the business was put up for sale by auction and was purchased by Noorullah. The question was as to the status in which the income of the business was to be taxed. ' This Court held that the High Court had rightly come to the conclusion that the business was the business of an association of persons. None of the partners wanted to break the unity of control of
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the business or its continuity and the business was of such a nature that it could not be ...Arried on without such consensus. The income was the income of a business which was carried*n 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 did not affect the incidence of taxation. ' Although strong reliance was placed on these three decisions on behalf of the appellant, none of these decisions comes to the aid of the contentions made on behalf of the appellant. ' The finding of fact in the case of Indira Balkrishna (1960)…
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