1. The following four questions have been referred to this court under s. 256(1) of the I.T. Act, 1961, at the instance of the Revenue :
'1. Whether, on the facts and in the circumstances of the case in holding the orders of the Appellate Assistant Commissioner cancelling the assessments framed by the Income-tax Officer in the status of an AOP ?
2. Whether the Appellate Tribunal was correct in holding that no association of persons was in existence and the assessments framed in the status of an AOP were not valid assessments ?
3. Whether the Appellate Tribunal was correct in holding that no AOP was formed by virtue of the memorandum of partition and the share income derived from the firm did not belong to an AOP ?
4. Whether the notices issued u/s. 148/139 were invalid ?'
2. This reference arises out of assessment proceedings for the assessment years 1972-73 and 1973-74 against the assessee, Indramohan Sharma, and other members of his erstwhile joint family, consisting of himself, his wife and two minor sons, on the footing that they were liable to be assessed as an association of persons. We have set out in detail the facts relating to the partition between the assessee and the other members of the joint family evidenced by the deed of partition dated 21st January, 1971, in our order in Income-tax Reference No. 412 of 1978 decided on 14th January, 1981, CIT v. Indramohan Sharma (No. 1) : 138ITR696(Bom) . We have also in that reference constructed the legal effect of the partition deed vis-a-vis, the income in the form of profits of the partnership which came to the share of the assessee, Indramohan, who continued to be a partner in the firm by virtue of an agreement contained in the deed of partition and we have held that the profits received by the assessee, Indramohan, were received for and on behalf of the other members of the erstwhile joint family, who were entitled to their respective shares in their won independent right. It appears that after the income in the form of share of profits from the partnership firm, M/s. Flour Millers Engineering Corporation, was assessed by the ITO in the hands of the assessee as the income of the HUF, the ITO took the view that the members of the erstwhile joint family of assessee, Indramohan, along with himself were assessable on the income received through Indramohan in the status of an association of persons. Holding that there was a failure on the part of the assessee to file a return under s. 139 of the I.T. Act, and further holding that income taxable had escaped assessment, the ITO proceeded under s. 147(a) of the Act and issued a notice under s. 148 on 11th March, 1977. The ITO rejected the case of the assessee that the erstwhile members of the joint family could not be assessed as an association of persons. These orders for the two years in question were, however, set aside by the AAC, who took the view that no association of persons or body of individuals or a firm came into existence on the partition of the joint family. Following the decision of the Gujarat High Court in Addl. CIT v. Chandulal C. Shah : 107ITR91(Guj) , he held that the assessment as an association of persons could not be sustained and further, relying on the decision of the Tribunal in the appeal out of which Income-tax Reference No. 412 of 1978 CIT v. Indramohan Sharma (No. 1) (see p. 696 supra) arose, it was held that the agreement of partition created an overriding title in favour of the erstwhile members of the joint family. The view of the AAC was upheld by the Tribunal dismissing the appeals filed by the Department. That is how the four questions, reproduced above, have been posed for decision.
3. Shri Joshi, the learned counsel for the Revenue, contended that the erstwhile members of the joint family had combined together in a common purpose for earning profits from the partnership firm and though the erstwhile karta received the profits on behalf of the other members of the joint family, even according to the terms of partition, the assessment of the erstwhile members of the joint family as an association of persons should be held to be permissible.
4. It is not possible for us to accept this contention. The finding given by the Tribunal and confirmed by us in Income-tax Reference No. 412 of 1978 CIT v. Indramohan Sharma (No. 1) (see p. 696 supra) was that when Indramohan received profits of the partnership firm, he no doubt received them for himself as well as on behalf of the erstwhile members of the joint family, but it was also held, in that reference, that each erstwhile member of the joint family was entitled to his stipulated share of the profits in his own right. On the terms of the partition deed, it was held that though the profits were received by Indramohan on behalf of all the members of the erstwhile joint family, the nature of the profits received was such that each one of them was severally entitled to his respective share in his own right. Now, it is difficult for us to see how on this finding recorded in respect of the partition deed executed on 21st January, 1971, which is also annexed as annex. 'A' to the statement of the case in this reference, it can even be contended that the members of the erstwhile joint family had joined in a common purpose or had joined in any action or business. If an independent right in favour of each one of the members of the erstwhile joint family is created in respect of a particular stipulated share in the profits of the firm and each one thus has an independent right against the erstwhile karta, merely because the karta received the entire profits in a lump sum, it cannot be held that the member of the erstwhile joint family formed an association of persons. In G. Murugesan & Brothers v. CIT : 88ITR432(SC) , the Supreme Court, has reproduced the observations regarding the concept of an association of persons. In the earlier judgment of the Supreme Court in CIT v. Indira Balkrishna : 39ITR546(SC) , after pointing out that 'to associate' means 'to joint in common purpose, or to join in an action', the Supreme Court has observed as follows (p. 551) :
'Therefore, an association of persons must be one in which two or more persons joint in a common purposes or common action, and as the words occur in a section which impose a tax on income, the association must be one the object of which is to produce income, profits or gains.'
5. The pre-condition for persons being assessed as an association of persons, therefore, is that there must be an association, the object of which must be to produce income, profits or gains. It can hardly be disputed that when there is a disruption of the joint family, each member of the joint family holds the property which falls to his share as an owner in his own right. By the mere fact of partition no association of persons is brought into being. Indeed, if the effect of partition is that each member is separated in status and estate from another, unless there is some further act on the part of such members on the basis of which an inference is drawn that they have combined or joined in a common purpose, it would be difficult to hold that they formed themselves into an association of persons as contemplated by the I.T. Act. The right to receive the stipulated share of profits from the partnership firm, where the erstwhile karta continued to be a partner, did not flow from any agreement between the parties to carry on any common venture, but that right flowed from the right of a separated member of a Hindu joint family as a result of partition, It is, therefore, difficult to accept the contention raised on behalf of the Revenue that the different members of the family of the assessee, after partition, could be assessed as an association of persons. The finding recorded by the AAC and the Tribunal that the action of the ITO in proceeding to assessee the members of the erstwhile joint family as an association of persons is invalid is justified in law. The answer to all the four questions would flow from this conclusion and would be against the Revenue. The questions are thus answered as follows :
6. Question No.1 : In the affirmative and against the Revenue.
7. Question No.2 : In the affirmative and against the Revenue.
8. Question No.3 : In the affirmative and against the Revenue.
9. Question No.4 : In the affirmative and against the Revenue.
10. Revenue to pay the costs of this reference.