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Commissioner of Income-tax, Andhra Pradesh Vs. Pabbati Shankaraiah and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 94 of 1978
Judge
Reported in(1984)38CTR(AP)37; [1984]145ITR702(AP)
ActsIncome Tax Act, 1961 - Sections 2(3), 2(31), 32(1), 47, 47(2), 86, 139(2), 148 and 269C
AppellantCommissioner of Income-tax, Andhra Pradesh
RespondentPabbati Shankaraiah and ors.
Appellant AdvocateM.S.N. Murthy, Adv.
Respondent AdvocateY.V. Anjaneyulu, Adv.
Excerpt:
direct taxation - 'body of individuals' - sections 2 (3), 2 (31), 32 (1), 47, 47 (2), 86,, 139 (2), 148 and 269 of income tax act, 1961 - manager of joint family held shares in firm in his capacity as manager - shares partitioned between members even though such manager remained partner vis-à-vis firm - income derived from such shares - partition effected joint ownership of shares into several and distributed income from such shares between members - members of such family cannot be treated as body of individuals for the purpose of assessment. - motor vehicles act (59 of 1988)section 149 (2): [v. gopala gowda & jawad rahim, jj] insurers entitlement to defend the action joint appeal by insured and insurer - held, the language employed in enacting sub-section (2) of section 149.....seetharama reddy, j.1. the question of law raised at the instance of the revenue, in this consolidated reference, pertaining to the common assessee in respect of the assessment years 1966-67 to 1971-72 is : 'whether, on the facts and in the circumstances of the case, the assessment in the status of 'body of individuals' in respect of the share income from the firm, t.l. jagannadham son, is valid ?' 2. the format of the case, as set out in the statement of case, is that shankaraiah is the karta of the huf consisting of himself, his major son, rajanna alias raja veeraiah and his two minor sons, samba murthy and ravinder and his wife. he was a partner in a firm known as m/s. thota lingaiah gari jagannadham son, having 30% share. admittedly, the share income belonged to the huf, as he was.....
Judgment:

Seetharama Reddy, J.

1. The question of law raised at the instance of the Revenue, in this consolidated reference, pertaining to the common assessee in respect of the assessment years 1966-67 to 1971-72 is :

'Whether, on the facts and in the circumstances of the case, the assessment in the status of 'body of individuals' in respect of the share income from the firm, T.L. Jagannadham Son, is valid ?'

2. The format of the case, as set out in the statement of case, is that Shankaraiah is the karta of the HUF consisting of himself, his major son, Rajanna alias Raja Veeraiah and his two minor sons, Samba Murthy and Ravinder and his wife. He was a partner in a firm known as M/s. Thota Lingaiah Gari Jagannadham Son, having 30% share. Admittedly, the share income belonged to the HUF, as he was representing the family being the karta of it. The share income from the firm was being assessed in the hands of the HUF up to and including the assessment year 1964-65. On October 26, 1963, there was a partial partition in the family, which was reduced to writing by a memorandum. This partial partition was only in respect of the interest of the family in the aforesaid firm. The division was effected by allotting 12% to Shankaraiah and 6% to each of his sons. The capital standing in the name of Shankaraiah in the firm, which admittedly belonged to the joint family, was divided into four equal shares and necessary entries were also made in the books of the firm as an October 26, 1963. Respective accounts were opened in the books of the firm crediting the amounts divided. It was further agreed that Shankaraiah should continue to remain as a partner vis-a-vis the partnership firm and the profit derived by him will be divided between himself (12%) and the three sons at 6% each. Some movables as well as immovable assets were not divided. On October 26, 1963, another agreement was brought into existence. This agreement, having recognised the partial partition between Shankaraiah and his sons, further mentioned that Shankaraiah will continue as a partner but he will receive shares of profit not only for himself but for his sons who have acquired their rights at 6% each by virtue of the partial partition. It was made clear in the agreement that the sons have no rights in the assets of the firm. They have only right to claim for the profits of 6% each from Shankaraiah. It was further mentioned that the sons had agreed to keep Rs. 12,000 either with their father or with the firm towards the share of 6% already held by each of the parties. Shankaraiah's major son, Veeraiah, was taken as a partner in the firm of M/s. T. L. Jagannadham Son and by virtue of his right he was receiving his share income at 6%.

3. Assessments were made for the assessment years 1966-67, 1967-68, 1968-69 and 1969-70 on Sankaraiah on the basis of partial partition and 12% share income received by him from the firm was included. The share income of the minor sons which they were entitled to as per the partial partition and the agreement dated October 26, 1963, was not included in there was a 'body of individuals' consisting of Shankaraiah and his two minor sons, which had to be assessed in respect of 24% shares of profit from M/s. T. L. Jagannadham Son. Consequently, he issued a notice under s. 148 on the alleged 'body of individuals' represented by Shankaraiah for the assessment years 1966-67, 1967-68, 1968-69 and 1969-70. For the assessment years 1970-71 and 1971-72 notices under s. 139(2) were issued on the said 'body of individuals'. The assessee filed disposed of on November 7, 1972. The assessee, being unsuccessful, preferred writ appeals which were also dismissed on July 3, 1974. The learned singled judge, while dismissing the writ petitions, observed :

'Prima facie they are a 'body of individuals' a explained by this court in Deccan Wine and General Stores, Hyderabad v. CIT (R. C. No. 101/1970- : [1977]106ITR111(AP) ). We are of the view that the expression 'body of individuals' should receive a wide interpretation, perhaps not wide enough to include a combination of individuals who merely receive income jointly without anything further as in the case of co-heirs inheriting shares or securities, but certainly wide enough to include a combination of individuals who have a unity of interest but who are not actuated by a common design, and one or more of whose members produces produce or help to produce income for the benefit of all.'

4. In the appeal filed by the assessee, there was no reference to this aspect as the only question argued was with regard to the legality of the notice issued under s. 148. Thereafter, the ITO passed the assessment orders for those years on the ground that the share income held in the name of any one of the undivided family members is to be assessed in the hands of 'body of individuals'. Thus he brought to tax 24% share of the profit from the firm of M/s. T. L. Jagannadham Son in the hands of 'body of individuals'. He, however, had not taken into account the share income of the major son, Veeraiah, which he received by virtue of his independent right as a partner of the said firm. On second appeal, the Appellate Tribunal placing reliance on a decision in CIT v. Harivadan Tribhovandas 0043/1973 : [1977]106ITR494(Guj) , held :

'The Tribunal in extenso quoted some of the observations of the Gujarat High Court and applied the test laid down therein. Applying those tests, the Tribunal held that there was no 'body of individuals' in the case before it. It was found that there was no activity carried on by the 'body of individuals'. All that happened was that there was a partial partition effected in the family and by virtue of that each member was allotted a share. If an asset is incapable of division one of the modes is to dispose of that asset and share the proceeds thereof among the persons entitled to share. Another method may be to keep the property as joint property and the income derived therefrom is only divided. Yet another method may be to allot that particular property in favour of one coparcener who would be asked to compensate the other coparceners. There are no limitations as regards the method of dividing the common property. In this case the family thought fit to divide it in the manner in which they did. The family represented by its karta was admittedly having interest in the partnership firm. The share in the partnership firm is an asset of the family which is the subject-matter of the partial partition. That share can be divided in any manner in which the parties choose to divide. In this case the mode of division is that the karta continues to be the partner via-a-vis the firm but is accountable to the divided members so far as the shares from the partnership firm are concerned. Qua the firm only the karta is the partner and the divided members only appeared as creditors in the books of the firm as the capital has been divided in equal shares and separate accounts are maintained so far as divided members other than the karta.......... Merely because a division has taken place in the manner done by the parties in this case it does not mean that the parties can be held to constitute 'a body of individuals' in regard to the share income from the firm which has been the subject matter of the partial partition. Each of the divided members are only tenants-in-common in respect of the share income from the partnership firm.'

5. While distinguishing the case of Deccan Wine and General Stores v. CIT : [1977]106ITR111(AP) , it was observed by the Tribunal :

'... that was the case where the business had been carried on by the legal representatives after the death of the individual.'

6. Adverting to the observations made by the learned single judge in the writ petitions, the Tribunal held that those observations were only tentative observations and were not final pronouncements. The Tribunal rejecting the argument of the Revenue that the arrangement, which was entered into, brought about a 'body of individuals', as one of the body of the individuals earned money by being a partner and sharing the profits thereof among the members of the body, held that for a division of the share of the partnership there was no need for any agreement for passing of the share to the divided members. In this case it was by mutual agreement that Shankaraiah alone has continued as partner but at the same time the interest of shankaraiah was that of the family and that interest having been divided all the members were entitled to a share in that interest. The Tribunal, therefore, found that this sort of division is one of the accepted modes of division of interest of the properties of a joint family and there can be no objection to the same'. It was also observed by the Appellate Tribunal :

'The Tribunal also stated that even though a specific agreement entered into by the parties, Shankaraiah would be under an obligation to pass on the share income to the divided members as per the partial partition.'

7. The above conclusion of the Tribunal was reached on the basis of the decision of the Gujarat High Court in the case of Additional CIT v. Chandulal C. Shah : [1977]107ITR91(Guj) . Thus the Tribunal held that there was no 'body of individuals' to be assessed as a unit of assessment.

8. Revenue's case : The contentions of Sri M. Suryanarayanamurthy. learned counsel for the Revenue, are :

(1) The definition of 'person' for the first time is brought in the concept of 'body of individuals' as a unit of assessment by virtue of the I.T. Act, 1961, under s. 2(31). It should be contrasted with the concept of 'association of persons'. The agreement entered into by Shankaraiah with his two minor sons represented by their mother brought about a 'body of individuals' with a common purpose of producing income.

(2) Even in a case where a superior title is said to arise out of the transactions, the 'body of individuals' nevertheless emerges and that being a unit of assessment it has to be assessed as such.

9. Strong reliance was placed on the observations made by the learned single judge in the writ petitions and also on the decision of this court in Deccan Wine and General Stores v. CIT : [1977]106ITR111(AP) , and a lot of case law cited in support of the above contentions.

10. Case of the assessee : The counter-contentions of Sri Anjaneyulu, learned counsel for the assessee, are :

(1) that Shankaraiah was holding the 24% share in the partnership firm on behalf of himself and his two minor sons in agreed proportions as per the agreement dated October 26, 1963. Out of the profits realised by him against the 24% share, Shankaraiah was holding in trust under s. 90 of the Indian Trusts Act on behalf of each of his two minor sons the profits corresponding to their 6% shares and those profits right form the inception belonged to each of the two minor sons and not to any alleged association consisting of Shankaraiah and his two minor sons :

(2) that by agreement dated October 26, 1963, Shankaraiah agreed to hold the share of 24% in the partnership firm in his individual name subject to the obligation that the income corresponding to the share of 6% pertaining to each of his two minor sons shall be paid to them. The agreement, therefore, created a superior title in favour of the two minor children and the income corresponding to their 6% share each in the firm was diverted in their favour by an overriding obligation enforceable against Shankaraiah and constituted their income right from the inception. It is was their income although it cannot at the same time be the income of a 'body of individuals' allegedly consisting of the father and the two minor sons to be assessed as separate unit of assessment, and

(3) that is any event the father and two sons did not constitute a 'body of individuals' for the purpose of assessment under the I.T. Act.

11. Relevant material : Before adverting and analysing the arguments and the counter-arguments of the parties, the relevant statutory provision and also the materials contained in the memorandum of partition and the agreement to share may be noticed.

12. Section 2(3) of the I.T. Act, 1961, reads as under :

''person' includes -

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridicial person, not falling within any of the preceding sub-clauses;'

13. MEMORANDUM OF PAST PARTITION

'This Memorandum of Past Partition is executed this 26th day of Octomber, 1963, between :

1. Pabbati Shankaraiah, son of Veeraiah aged about 47 years, resident of Warangal, hereinafter called 'the first party';

2. Pabbati Rajanna alias Raja Veeraiah, son of Shankaraiah, aged about 22 years, resident of Warangal, hereinafter called 'the second party';

3. Pabbati Samba Murthy, son of Shankaraiah, aged about 15 years, resident of Warangal, hereinafter called 'the third party';

4. Pabbati Ravinder, son of Shankaraiah, aged about 9 years, resident of Warangal, hereinafter called 'the fourth party';

14. (The parties 3 and 4 being minors are represented by their mother and nearest relative, Pabbati Agamma, wife of Shankaraiah, acting as guardian for them for the limited purpose of partition......)

15. Whereas the joint family having movable and immovable properties and a share through the karta in the business run in partnership with other in the name and style of M/s. Thota Lingaiah Gari Jagannadham Son, I and General Merchants, Warangal' : Whereas the family is enjoying the said properties as joint family properties and whereas the first party decided to effect partial partition of business assets and the share Re. 0-4-9 (equivalent to 30Ps. out of one rupee held in his name in the said firm of 'M/s. Thota Lingaiah Gari Jagannadham Son' by metes and bounds and accordingly he has divided the capital of Rs. 58,126 26 belonging to the joint family and standing to the credit of the first party in the said firm's books as on October 26, 1963, in four equal shares and credited the share of capital falling to the share of each of the parties 1 to 4 hereto their respective accounts in the said firm's books as on October 26, 1963, and Whereas he has also partitioned Re. 0-4-9 (equivalent to 30Ps.) share held by him between himself and his sons two, three and four named above as on October 28, 1963, and according to the said partition each of the parties 2, 3 and 4 named above have held one anna (equal to 6Ps.) share out of Rs. 0-4-9 (equal to 30Ps.) in a rupee share held by the first party in his name in the said firm and Whereas the said first party has agreed to pay one anna share of profits (equal to 6Ps.) to each of the parties 2, 3 and 4 from our of Rs. 0-4-9 share of profits (equivalent to 30 Ps.) excluding interest that may be earned by him in the said firm in his personal capacity from October 26, 1963, and agreed to execute a separate agreement to that effect......

16. AND WHEREAS the share, the capital, the share in reserve and insurance policies shown in schedule 'C' hereto were allotted to party No. 1 in the said partition on October 26, 1963, and continued to be separate and personal properties of the said first party Pabbati Shankariah, and Veeraiah......

SCHEDULE 'C'

17. Movable assets provided to Sri P. Shankaraiah

(1) Amount of Rs. 14,531.56Ps., being 1/4th share of capital in the firm of M/s. T. L. Jagannadham Son, Warangal.

(2) Insurance policy No. 12625961 Dt. 28-12-1957 for Rs. 2,000 to be matured on 28-12-1972. Annual Premium Rs. 147.

(3) Insurance policy No. 12673032 Dt. 28-11-1959 for Rs. 2,000 to be matured on 28-11-1969. Annual premium Rs. 220.88.

(4) Re. 0-4-9 share in the firm of M/s. T. L. Jagannadham Son.

(5) Share in reserve of the said firm.

AGREEMENT

18. This agreement is executed this 26th day of October, 1963, Between : -

(1) Pabbati Shankaraiah, son of Veeraiah, aged about 47 years, resident of Warangal, hereinafter called 'the first party'

(2) Pabbati Raja Veeraiah, son of Shankaraiah, aged about 22 years resident of Warangal, hereinafter called 'the second party'.

(3) Pabbati Samba Murthy, son of Shankaraiah, aged about 15 years, resident of Warangal, hereinafter called 'the third party'.

(4) Pabbati Ravinder, son of Shankaraiah, aged about 9 years, resident of Warangal, hereinafter called 'the fourth party'.

19. (The parties 3 and 4 being minors are represented by their mother and nearest relative, Pabbati Agamma, wife of Sankaraiah, acting as guardian for them for the limited purpose of partition.)

20. Whereas the parties one to four named above constituted a Hindu joint family and whereas by mutual agreement the have divided the business assets, namely, the capital and the share, in the partnership business run in the name and style of 'Thota Lingaiah Gari Jagannadham Son' at Main Road, Warangal, and whereas according to the said partition the share Re. 0-4-9 (equivalent to 30Ps.) held by the first party continued in the name of the first party, and one anna share (equivalent to 6 Ps.) out of Re. 0-4-9 share was to allotted each of the parties 2, 3 and 4 named above and the balance of Re. 0-1-9 or (12Ps.) share allotted to party No. 1 and whereas the first party has thus agreed to hold the share in his name for the benefit and enjoyment of himself to the extent of Re. 0-1-9 (equivalent of 12Ps.) and to the share to the benefit of parties 2, 3 and 4 and Whereas the parties 2, 3 and 4 wanted an agreement for the said agreement to be reduced to a writing, misunderstandings lest there might be, among them.

THIS AGREEMENT WITNESSETH AS FOLLOWS

21. The share of Re. 0-4-9 (equivalent of about 30Ps.) is allotted to the first party, out of the profits fallen to the share of the first party, he shall pay one anna share of profits to the parties 2, 3 and 4.

2. The parties 2, 3 and 4 are entitled to claim from the first party only one anna share of profits out of the share of profits falling to the share of Re. 0-4-9 (equivalent to 30Ps.) share held by the first party in the firm of 'M/s. Thota Lingaiah Gari Jagannadham Son' Main Road, Warangal.

3. The parties 2, 3 and 4 shall have no right in the assets of the firm of M/s. Thota Lingaiah Gari Jagannadham Son either by reason of this agreement oar by reason of the partition among the parties 1 to 4 hereto except to claim for the profits of one anna share by each of them from the profits falling to the share of the first party.

4. The party No. 2 and the guardian and mother for the parties 3 and 4 have agreed to bear out of the losses falling to the share of the first party in proportion to which the parties 2, 3 and 4 are entitled to the profits in that share. In case the parties 2, 3 and 4 wanted to join in the partnership in the said firm of 'Mrs. Thota Lingaiah Gari Jagannadham Son', the first party shall surrender out of Re. 0-4-9 (equivalent to 6Ps.) to each one of them who claims to join as a partner with the consent of all the partners in the said firm. Anyone out of parties 2, 3 and 4 that may be admitted in partnership shall be entitled to a share in the reserve of the said firm provided he or they undertakes to adopt the assets and liabilities of the said firm at book values. As and when any of the parties 2, 3 and 4 becomes partners in the said firm of 'M/s. Thota Lingaiah Gari Jagannadham Son' the first party is not liable to pay the profits to said persons as per this agreement.

5. Party No. 2 and the guardian and mother for each of the parties 3 and 4 have agreed to keep Rs. 12,000 (Twelve thousand) either with the first party or with the firm of M/s. Thota Lingaiah Gari Jagannadham Son, Warrangal, towards the share of 6 Ps. held by each of the parties and each of the parties are entitled to interest on the capital in addition to the share either from the firm or for the first party.

6. The parties 2, 3 and 4 shall not be entitled to any share in the profits from the first party from the date the capital is withdrawn from the firm or from the first party.

7. The parties 2,3 and 4 shall not be entitled to interest on the capital and interest on the accumulated profits standing to the credit of the first party retained in the said firm, but entitled to the profits as provided heretoabove.

8. In the case the first party retains the profits due to parties 2, 3 and 4 hereto such amount retained by him must be treated as a loan by the parties whose profits are retained to the first party and the first party shall pay such profits with interest.

9. The parties 2, 3 and 4 shall not be entitled to a share in goodwill or share in the reserves of the partnership except in case they are admitted into partnership.

22. In witness whereof the parties hereto set their hands this day this month and this year above written.

Signature of witnesses Signature of partners1. Sd./ Chidara Chandrasekharam 1. Sd./ Pabbati Sankaraiah2. Sd./ Rayabarapu Venkateshwarlu 2. Sd./ Pabbati Rajaveeraiah3. Sd./ Agamma4. Sd./ Agamma

(The parties 3 and 4 being minors are represented by their mother and nearest relative, Pabbati Agamma, wife of Shankaraiah, acting as guardian for them for the limited purpose of partition.'

23. The case-law cited may also be referred to.

24. Concept of 'Body of individuals'

25. In Deccan wine & General Stores v. CIT : [1977]106ITR111(AP) , one late Pannalal, apart from owning immovable properties, ran certain business known as 'Deccan Wine and General Stores', 'Moti Wine and General Stores' and 'Tinus Bar and Hotel'. He died in 1959 and his heirs, his widow and two minor children succeeded to the three businesses. For the assessment years 1961-62 and 1963-64, assessments were made as if the assessee's status was a 'Hindu undivided family'. For the assessment years 1964-65 and 1965-66 the assessee claimed the status of an 'association of persons' and assessment were made on that basis. For the assessment year 1966-67 also the assessee submitted a return claiming the status of an 'association of persons'. However, by a subsequent letter dated March 27, 1967, it was claimed that each of the three individuals, i.e., the mother and the two minor children (the children continued to be minors) should be separately assessed in their 'individual' status on their respective one-third share of the income from the business. It was pointed out in the letter that in the course of the year of account there was a partition of the businesses in the sense that the capital of the businesses was divided in equal shares between the three individuals. The ITO held that the three persons constituted a 'body of individuals' and should be assessed as such and not as an 'association of persons' either. The order of assessment made by the ITO was confirmed by the AAC and the Income-tax Appellate Tribunal. On a reference the question that was answered by the High Court was 'whether, on the facts and the circumstances of the case, the assessment for the assessment year 1966-67 has been validly made in the status of a 'body of individuals'

HELD (p. 117 of 106 ITR) :

'We are of the view that the expression 'body of individuals' should receive a wide interpretation, perhaps not wide enough to include a combination of individuals who merely receive income jointly without any thing further as in the case of co-heirs inheriting shares or securities, but certainly wide enough to include a combination of individuals who have a unity of interest but who are not actuated by a common design, and one or more of whose members produce or help to produce income for the benefit of all.'

26. It was further held (p. 118 of 106 ITR) :

'In the present case, the three individuals have a common interest in businesses. The businesses ar carried on for the benefit of all of them. They cannot constitute an association of persons because two of them are minors and their guardian is herself the third person of the combination and there is, therefore, none who can agree on behalf with the third person. But though the businesses are not carried on pursuant to a common design, they are carried on for their common benefit by one of them representing all of them. The three individuals, in our opinion, clearly constitute a body of individuals. The question referred to us is, therefore, answered in favour of the Department.'

27. Ultimately it was held (p. 115 of 106 ITR) :

'In the light shed by section 86(v), it becomes clear that the 'body of individuals' mentioned by section 2(31)(v) must also include bodies whose members are entitled to receive part of the income of such bodies. Again, it may be noted here that under the present Act there is an express provision (section 168) which prescribes that executors should be assessed as 'an association of persons'. Even under the 1922 Act the law was well-settled that co-trustees and co-executors could be assessed as 'an association of persons'....... There was hardly any need to introduce the expression 'body of individuals' merely to cover cases already held to be covered by another expression.'

28. In CIT v. Harivadan Tribhovandas 0043/1973 : [1977]106ITR494(Guj) , it was held (headnote) :

'The assessee and his two brothers received certain properties on a partition in 1958. The property covered by survey No. 170-I continued to be held by the assessee and his brothers jointly even after partition. In 1961, this property was divided among the assessee and his brothers. The assessee was given a sum of Rs. 36,630 in lieu of lands. At the stage of partition one-third portion of the land was mentioned as being worth Rs. 18,400. In the assessment proceedings for the assessment year 1962-63, the Income-tax officer sought to assess the amount of Rs. 18,230 as capital gains. On appeal, the assessee contended that the land comprised in survey No. 170-I were agricultural lands and, alternatively, that the assessee and his brother were a body of individuals. The Tribunal, on the view that a 'body of individuals' is any group of individuals whatsoever irrespective of the object which brought them together and irrespective of the activities which they carry on, held that the assessee and his brothers, in so far as they were joint owners of the property, constituted a body of individuals and so fell within the exemption under section 47(ii).'

29. While refusing to answer the question, the High Court observed that the Tribunal had failed to consider and decide the two questions : (i) Whether the assessee and his brothers constituted a 'body of individuals' in the sense that they were a combination of persons who carried on some activity with the object of deriving income therefrom, and (ii) whether the particular lands were agricultural lands It was further held (head note) :

'The words 'body of individuals' in occurring in the Income-tax Act in the definition of the word 'person' in section 2(31) means a conglomeration of individuals who carry on some activity with the object of earning income. The body of individuals must be carrying on an activity with a view to earn income because it is only with such a body of individuals that the Income-tax Act is concerned and again the words 'body of individuals' derive colour from the context in which they occur, namely, an association of persons.'

30. In Meera & Co. v. CIT , an individual carried on business and was assessed under the trade name 'M/s. Meera & Co.'. He died and after his death the business was carried on by his widow on her behalf and on behalf of her three children.

'Held (headnote) that, in the instant case, the business came to be owned by the widow and her three minor children on the death of their predecessor-in-interest. In this situation the widow being the only adult member in the group of legal heirs of the deceased continued the business for the benefit of all...... The income had accrued or should be deemed to have accrued to the body of individuals consisting of P's widow and her three minor children.'

31. Further held (headnote) :

'The expression 'body of individuals' must have a distinct meaning of its own irrespective of the fact that it may have some characteristics common with an 'association of persons.' It could not be the same thing as, or a mere species of, an 'association of persons'. An 'association of persons' does not mean any and every combination of persons. It is only when they associate themselves in an income producing activity that they become an 'association of persons'. The expression 'body of individuals' should receive a wider interpretation, perhaps not wide enough to include a combination of individuals who merely receive income jointly without anything further as in the case of co-heirs inheriting shares or securities, but certainly wide enough to include a combination of individuals who have a unity of interest but who are not actuated by a common design and one or more of whose members produce or help to produce income for the benefit of all. A 'body of individuals' need not necessarily be the result of an agreement, arrangement or design. It might arise out of a certain situation.'

32. In CIT v. Deghamwala Estates : [1980]121ITR684(Mad) , it was held that mere execution of a document of sale by two or more persons owning the property jointly cannot bring the co-owners together as a body of individuals. There must be something more than joining together and executing the document. It was further held (headnote) :

'In order to constitute an association of persons, there must be joining together in a common purpose or in a common action, the object of which is to produce income, profits and gains. Though a body of individuals is not identical with an association of persons, they have some similarities. An association of persons may consist of non-individuals also but a body of individuals has to consist only of individuals or human beings. The word 'body' would require an association for some common purpose or for a common cause or there must be unity under some common tie or occupation. A mere collection of individuals without a common tie or common aim cannot be taken to be a body of individuals falling within s. 2(31) of the I.T. Act, 1961.... Section 47(2) of the I.T. Act, 1961, appears to give a clue to the interpretation of the body of individuals when it contemplates that the body of individuals whether incorporated or not must be capable of holding properties as an entity and of distributing them at the time when it dissolves. A common purpose, a common tie, actual or potential capacity to hold properties or disposable income would be the minimum requirement of a body of individuals. The purpose or aim in the context of the I.T. Act should be to produce income or hold income producing assets.'

33. In Deccan Wine and General Stores v. CIT : [1977]106ITR111(AP) , the ratio of the Supreme Court in CGT v. R. Valsala Amma : [1971]82ITR828(SC) , was distinguished on the ground that case arose under the G.T. Act and that the meaning of the same expression under the two different Acts may vary; but, however, the manner of distinction of the Supreme Court's decision has been dissented from in the judgment of the Gujarat High Court in CIT v. Harivadan Tribhovandas 0043/1973 : [1977]106ITR494(Guj) observing that - 'We do not agree with the conclusion of the learned judges of the Andhra Pradesh High Court regarding this distinction between the provisions of the G.T. Act the I.T. Act.'

34. In CIT v. T. V. Suresh Chandran : [1980]121ITR985(Ker) immovable property was transferred by a deed executed by the transferors in favour of four transfers. The competent authority initiated proceedings for acquisition of the property covered by the transfers, and the entire property was acquired under one proceeding on the ground that the transfers constituted an association of persons or at least a body of individuals because - (i) the four transfers were brothers; (ii) though the transfer was of distinct plots to the four transfers there was only one agreement preceding the transfer; (iii) one of the brothers alone paid the advance; (iv) only one deed of sale was executed; (v) after the purchase the entire property was levelled up and pile driving commenced before the purchase was completed; and (vi) such pile driving was only for the construction of one building.

'Held (headnote) that each one of the four transfers has absolute right to the property transferred to him and, in the property transferred to one, the other transfers had no right...... In this case the question was whether the purchase was by an association of persons and not whether an association of persons came into existence after the purchase to run a joint venture. When four persons take sale deeds for different plots of land from the same vendor and when each one of the transfers gets absolute title to the property transferred to him there is no joining in the purchase by the transfers. The fact that they may make or put to common use the property purchased by them is a factor which would have no bearing on the purchase itself. Had the sales been effected by four different instruments the case urged by the Revenue may not have arisen. It would make no difference merely because the four sales were covered by one instruments. The transfer in this case was not by the transferors in favour of the four transferees of the entire property and s. 269C could not be applied on this basis.'

35. In CGT v. R. Valsalamma : [1971]82ITR828(SC) , the assessee and her sister received under the will of their mother, inter alia, a cinema theatre building with machinery and another building called 'police quarters'. Each one of them had a half share in the properties. They gifted these building to their brother by means of a single gift deed and the question was whether the assessee and her sister should be assessed in respect of the gift as individuals or as an association or body of individuals :

'Held, (headnote) that in law each one of them had half the right in the properties that they gifted to their brother. They were holding the property and made the gift as tenants-in-common. Each one must be held to have made a gift of her share of the property though the gift was made through one single document. The question whether they divided the property or not was not material. The assessee and her sister could not be assessed as an association or as a body of individuals. They could only be assessed in the status of individuals.'

36. In CIT v. R. S. Desale : [1982]137ITR117(Bom) the agriculturists of a taluka in Maharashtra decided to form a co-operative society to manufacture sugar. A body of 54 members was formed to take the necessary steps and this body was known as the working committee. Seven out of 54 persons were elected to the executive body and out of these 7 persons, 3 persons were appointed as promoters. There was considerable delay in the actual formation of the society as the necessary licence to erect a sugar factory could not be obtained from the Government. The promoters had already collected a large amount towards the share capital of the persons who were to become members of the co-operative society and the amount was deposited with banks which earned interest. Under s. 146 of the Maharashtra Co-operative Societies Act, the promoters were required to invest the amounts in banks as failure to do so would expose them to prosecution. Differing from the ITO as well as the AAC, the Tribunal held that the persons who intended to form a society formed a body of individuals, but with regard to the three promoters, it held that they were not the owners of the contributions but merely received the contributions and held the same for and on behalf of the contributors without claiming any interest therein and that, therefore, the interest received by the promoters could not be assessed in their hands in the status of a body of individuals. The Tribunal further held that a constructive trust had resulted under ss. 81, 90 and 94 of the Indian Trusts Act, 1882, in favour of the individual contributors for whose benefit they held it, that whether the promoters or the body of individuals represented by the promoters were agents of the members or were constructive trustees for the members, the interest income was diverted from them by an overriding title and legal obligation before its accrual and did not reach them and that though the correct status was that of a body of individuals, it was not assessable on the interest income as the interest income never reached it as its income. On a reference at the instance of the Revenue, it was held by the Bombay High Court (headnote) :

'(i) that the first requirement required to be satisfied before a group of persons could be treated as an association of persons is that they must have joined with a common purpose or in a common action and the second requirement is that the association must have the object of producing income. The promoters owed their status not to express any agreement among themselves, but they have become promoters as such by virtue of being nominated by the executive committee which was intended to look after the affairs of the co-operative society. Further, the object of appointing the three persons as promoters was was not to carry any business or earn any income, in the form interest from the deposits which were made out of the funds collected by way of contribution of share capital of the co-operative society, but they were to function as promoters for the limited purpose of doing everything that was necessary for the purpose of registration of the society and, once the society was registered, its affairs would be regulated by the provisions of Maharashtra Co-operative Societies Act. Therefore the promoters could not be called an association of persons for the purpose of assessability to tax.

(ii) A 'body of individuals' contemplated by the definition of 'person' in s. 2(31) of the Act must be a body which has the object of undertaking an income-producing activity. The promoters were merely fulfilling the statutory obligation when they deposited the moneys in the banks as required by law and the obligation did not amount to an income-producing activity. Therefore the promoters could not be assessed as an association of persons or body of individuals in respect of the interest earned on the contribution of share capital of the members deposited by the promoters in the banks.

(iii) When income is received by an agent, he receives it for and on behalf of the principal and there is no question of any overriding title. Since the promoters received the income as agents of the shareholders within the meaning of s. 182 of the Indian Contract Act, 1872, and the promoters did not have any title to the income, which really vested in the shareholders, there was no question of any overriding title to the shareholders because, even initially, the title to the income proportionate to the contribution of share capital vested in the shareholders themselves and the promoters were merely acting as agent.'

37. In our view, the factors that emerge, inter alia, out of the combined reading of the memorandum of the past partition and the agreement dated October 26, 1963, are :

(1) Partial partition has been effected in respect of the business assets and the share 0-4-9 (equivalent to 30 Ps) held in the name of Shankaraiah in the firm M/s. Thota Lingaiah Gari Jagannadham Son by dividing the capital belonging to the joint family and standing to his credit in the said firm's book in four equal shares and giving credit to the share capital falling to the share of each of the parties to their respective accounts in books.

(2) Partition of 0-4-9 (equivalent to 30 Ps) was effected between Shankariah and his three sons in the ratio of 12%, 6%, 6%, 6% each though the properties of the joint family remained joint.

(3) The share of 0-4-9 in the reserve held by Shankaraiah, the 1st party, though continued to be in his name but held it for the benefit and enjoyment of himself and also for the benefit and enjoyment of parties 2, 3 and 4. Though the share of 0-4-9 is held by Shankaraiah out of the profits that fall to the said share, he will pay 0-1-0 share to each of the parties 2, 3 and 4.

38. In our view, therefore, the vital aspect that emerges out of the above two documents is that on partial partition being effected, there is disruption of the joint family and each of the coparceners is holding his respective share in the assets of the firm separately and so too the profits that flow from out of the said share.

38. If this be the arrangement, the question that arises is whether the share income arising out of 0-4-9 share could be said to be the income of a 'body of individuals' for the purpose of levy and assessment of the tax under the Act.

39. There is no strait jacket formula as to what constitutes a 'body of individuals' and any attempt may defy the solution.

40. In the light shed by the case law, the expression 'body of individuals' cannot be said to include a combination of individuals who merely receive income jointly without anything further as in the case of co-heirs inheriting shares or securities. But, it could be said to include a 'combination of individuals, who have a unity of interest but who are not actuated by a common design and one or more of such individuals produce income for the benefit of all'.

41. The word 'person' in s. 2(31) includes a conglomeration of individuals who carry on some activity with the object of earning income. The words 'body of individuals' derive colour from the context in which they occur.

42. A 'body of individuals' need not necessarily be the result of an agreement, arrangement or design; it might arise out of a certain situation. Though a body of individuals is not identical with an association of persons they have some similarities. An association of persons may consist of non-individuals but not a body of individuals has to consist only of individuals or human beings. A mere collection of individuals without a common tie or common aim, cannot be taken to be a 'body of individuals'.

43. Now, the disruption of the family caused owing to partial partition in the assets of the firm resulted in the property being held by them as tenants-in-common. Each one has a distinct right in respect of his share. The mere fact that Shankaraiah held the entire share in his name and thereby distributed the profits in turn to the other coparceners would not, in any way, militate against the share of the assets of the firm being held by them as tenants-in-common.

44. Barring this, there is no provision either in the memorandum of past partition or in the agreement which would constitute 'unity of interest' : nor one of them (Shankaraiah) would be acting in the firm for the benefit of the two minors producing income for all of them, so that these ingredients could be said to contribute towards the formation of a 'body of individuals'. Even inferentially there is no room to conclude that the arrangement would give rise to a 'combination of individuals who have a unity of interest but who are not actuated by a common design and one or more of whose members produce or help to produce income for the benefit of all'.

45. The decision in Deccan Wines & General Stores v. CIT : [1977]106ITR111(AP) , which was treated as a sheet anchor to the case of the Revenue, makes a wide departure both in colour as well as content, from the case on hand. In the above case one Pannalal died and his heirs, his widow and two minor children succeeded to the three businesses wherein no stranger was either a participant or sharer. In fact, for a couple of years the assessee claimed the status of an 'association of persons' However, thereafter, it was claimed that the mother and the two minor children should be separately assessed in their 'individuals' status on their respective one-third share of the income from the businesses since there was a partition of the businesses. In this state of affairs, this court held that the three individuals had common interest in the business carried on for the benefit of all of them, though the businesses were no carried on by one of them representing all and that, therefore, the three individual constitute a 'body of individuals'.

46. Whereas, herein, Shankaraiah, on partition of the assets of the firm, held Rs. 0-4-9 share in his name, but they are distinct and separate shares held for and on behalf of the other members. There in nothing explicit or implicit to spell out from the two documents that there is a unity of interest and one of them is producing income for all. Firstly, the mother, who is the guardian of the two minor children, who are not connected with the business activity, does not participate in the firm's activity, and, secondly, it is not only Shankaraiah but there are other partners too, who carry on the business of the firm. So, there is no arrangement made in those documents showing that Shankaraiah as well as the other partners of the firm are carrying on business for the common benefit of all of them. In this format of the case, it is scarcely possible to that there is 'unity of interest' and that one of them is carrying on business of the common benefit of all of them so as to constitute a 'body of individuals'. The only consequence, in our judgment, that flows out of this arrangement is that Shankaraiah makes over the profits in favour of the minors in respect of their distinct and separate shares. Thus, at best, this could be postulated as a 'combination of individuals', who receive income jointly without anything further; and if that be so, it cannot bear the insignia of 'body of individuals' within the meaning of s. 2(31)(v) of the Act.

47. Further, in our undoubted view, Shankaraiah will be holding the income received by him as a constructive trustee under ss. 81, 90 and 94 of the Indian Trusts Act in favour of the two minors for whose benefit he holds it. Looking from this angle also, it cannot be held that Shankaraiah and two minors constitute a 'body of individuals'.

48. Preliminary objection - regarding diversion of income by overriding title :

The learned counsel for the Revenue raised a preliminary objection with regard to the argument advanced by Sri Anjaneyulu, learned counsel for the assessee, on the aspect of 'diversion of income by overriding title' stating that this is a different and fresh aspect, which is not open to the assessees to raise in this reference. He further submitted that even if a point was raised, but left unconsidered, the same cannot be allowed to be raised in reference.

49. Reliance was placed on the following case law. The Kerala High Court in C. V. Mathukutty v. CIT : [1977]108ITR1(Ker) held (headnote) :

'If it was unnecessary to consider the contention raised, as the case could be disposed of on other material, and was in fact disposed of on other material, the fact that the assessee had raised a contention, the consideration of which was unnecessary for disposing of the appeal and the fact that that contention had not been considered, would not give rise to a question of law which could be said to arise from the order of the Tribunal. A question of law could be said to arise from an order of the Tribunal when a consideration of that question was necessary for disposing of the appeal before the Tribunal.'

50. In CIT v. Burmah - Shell Oil Storage and Distribution Co. of India Ltd. : [1978]115ITR891(Cal) , the assessee-company was a distributor of petroleum products including gas for cooking. The gas was supplied to the company by a refinery and the company had purchased many specially made cylinders for the purpose of distributing gas to the customers. The customers returned the cylinders to the company after the gas was exhausted and they were refilled again and supplied to the customers. No revenue expenditure or depreciation on the cylinders was claimed or allowed in the past years' assessments. The company sold the cylinders to the refinery in the accounting year for Rs. 82,19,947 against their original cost of Rs. 1,09,63,754. The refinery continued to supply gas in those very cylinders to the company and the company, in its turn, distributed them to the consumers. The company claimed before the ITO that those cylinders were 'returnable packages' within the meaning of that expression used in Item M(2)(2)(d)(1) of Part I of the Depreciation Schedule, App. 1 of r. 5 of the I.T. Rules, 1962. It also claimed that it had incurred a loss of Rs. 27,43,807 on the sale of those cylinders and that this loss should be allowed as a deduction either under the aforesaid item or under s. 32(1)(iii) of the I.T. Act, 1961 (the Act). The ITO did not allow the claim.

51. The company lost its appeal to the AAC. On further appeal, the Tribunal held that the cylinders were 'returnable packages' and the loss of Rs. 27,43,807 'incurred by the company in the disposal of the cylinders is a loss allowable as a revenue expenditure within the meaning of' r. 5 of the I.T. Rules, 1962. The Tribunal did not deal with the company's claim under s. 32(1)(iii) of the Act, for, in its opinion, the company's arguments on that question did not survive. The Tribunal also allowed the full amount of the development rebate claimed by the company.

52. After considering the questions proposed by the Commissioner and those formulated by the assessee in reply, the Tribunal referred two questions of law framed by it : (i) 'Whether... the loss of Rs. 27,43,807 arising on the sale of gas cylinders was allowable as a revenue expenditure...... under the classification 'Mineral oil concerns in Item M(2)(2)(d)(1) under the heading '(iii) Special rates to be applied to other machinery and plant' in Part I of App. I to r. 5 of the I.T. Rules, 1962, or under s. 32(1)(iii) of the Act' (headnote) :

'Held : As the Tribunal did not deal with the company's claim under s. 32(1)(iii), the Tribunal must be deemed to have decided the question of law against the company. The contention for the company that the real controversy before the Tribunal was whether the loss of Rs. 27,43,807 was deductible in the computation of the business income of the company either under r. 5 read with item M(2)(2)(d)(1) or under s. 32(1)(iii), that these two provisions of law were two aspects of the same question whether the amount was deductible as a loss, and that the company was, therefore, entitled to rely on s. 32(1)(iii) on the question of the admissibility of this loss could not be accepted.'

53. For the converse proposition, the learned counsel for the assessee relied on the following decisions :

54. CIT v. Scindia Steam Navigation Co. Ltd. : [1961]42ITR589(SC) .

55. In this case the respondent company's steamship which was requisitioned by the Government was lost by enemy action on March 16, 1944. So it received compensation which exceeded the cost price of the steamship and the difference between the cost price and written down value was Rs. 9,26,532. In the assessment of the company for the assessment year 1946-47, the Department sought to charge this amount under the fourth proviso of s. 10(2)(vii) of the Indian I.T. Act, 1922, inserted by the I.T.(Amend.) Act, 1946, which came into force on May 4, 1946. But the company contended that the amount should be deemed to have been received on April 16, 1944, as was done for the purpose of the Excess Profits Tax Act, in which case it could not fall within the accounting period July 1, 1944, to June 30, 1945, relevant to the assessment year 1946-47. The Appellate Tribunal held against the company. On the application of the company the Appellate Tribunal referred the following question of law of the High Court : 'Whether, the sum of Rs. 9,26,532, was properly included in the assessee-company's total income computed for the assessment year 1946-47 ?' Before the High Court the company for the first time raised the contention that the fourth proviso to s. 10(2)(vii) did not apply to the assessment as it was not in force on April 1, 1946. On behalf of the Commissioner of Income-tax, a preliminary objection was raised that this question did not arise out of the order of the Tribunal within the meaning of s. 66 as it was neither raised before the Tribunal and dealt with by it nor referred to the court. The High Court overruled the objection on the ground that the form in which the question was framed was sufficiently wide to take in the new contention and the company was entitled to raise it even if that aspect of the question had not been argued before the Tribunal. On appeal to the Supreme Court (headnote) :

'Held, (i) that the High Court had jurisdiction to entertain the company's contention raised for the first time before it that the fourth proviso to section 10(2)(vii) did not apply to the assessment : (per Das, Kapur, Hidayatullah and verkatarama Aiyar, JJ) as the contention was within the scope of the question as framed by the Appellate Tribunal and was really implicit therein; (per SHAH, J.) as the question whether the fourth proviso to section 10(2)(vii) of the Act was applicable to the amount sought to be assessed as the company's income was a question arising out of the order of the Tribunal, and the High Court had jurisdiction to decide the question even if it was not raised and argued before the Tribunal.'

56. It was further held that 'under s. 66(2), the court cannot direct the Tribunal to refer a question unless it is one which arises out of the order of the Tribunal and was specified by the applicant in his application under s. 66(1).

(1) When a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order.

(2) When a question of law is raised before the Tribunal but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it, and is, therefore, one arising out of its order.

(3) When a question is not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order.

(4) When a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it.

57. A question of law might be a simple one, having its impact at one point, or it may be a complex one, trenching over an area with approaches leading to different points therein. Such a question might involve more than one aspect, requiring to be tackled from different standpoints. All that s. 66(1) requires is that the question of law which is referred to the court for decision and which the court is to decide must be the question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal, and it will be an over-refinement of the position to hold that each aspect of a question is itself a distinct for the purpose of s. 66(1) of the Act.

58. Sometimes the questions are framed in such general terms that, construed literally, they might take in questions which were never in issue. In such cases, the true scope of the reference will have to be ascertained and limited by what appears on the statement of the case.'

58. In Harish Chandra Golecha (HUF) v. CIT , the Rajasthan High Court held (headnote) :

'(i) if a point of law is implicit in or covered by the question referred to by the Tribunal and no additional facts are necessary to support that point, it may be raised for the first time before the High Court in a reference notwithstanding that it was not raised before or considered by the Tribunal. The expression 'question of law arising out of such order' in s. 66 of the Indian I.T. Act, 1922, cannot be restricted only to those questions which have been argued and decided by the Tribunal. Sometimes, a question of law is raised before the Tribunal but an aspect of that question is neither raised nor decided. In such circumstances, other aspects of the same question can be allowed to be urged before the High Court. Therefore, the question whether the loans were advanced to a registered shareholder or not, which was only one aspect of the applicability of s. 2(6A)(e) of the Act, could be entertained and dealt with by the High Court in the reference even though it was not urged before the Tribunal.'

59. In CIT v. V. Damodaran : [1980]121ITR572(SC) , the respondent, the managing director of a private company, withdrew from the company during the period January to March, 1959, amounts totaling Rs. 25,107. The balance-sheet of the company as at March 31, 1958, showed a net profit of Rs. 18,950. The respondent claimed that against the profit of Rs. 18,950 provision for taxation of Rs. 11,000 and provision for dividend of Rs. 6,900 had to be deducted and only the balance of Rs. 1,050 could be considered as deemed dividend under s. 2(6A)(e) of the I.T. Act of 1922. Rejecting his contention the ITO assessed the whole amount of Rs. 25,107 as deemed dividend under s. 2(6A)(e) by taking into consideration also the current profits of the year ending March 31, 1959. The Tribunal held that the current profits could not be taken into consideration, and, rejecting the contention of the respondent, also held that the two sums of Rs. 11,000 and Rs. 6,900 had to be taken into account as accumulated profits of the company for the purpose of s. 2(6A)(e). On the Department's application for a reference, the Tribunal referred the question whether the Tribunal was right in holding that the accumulated profits will not include the current profits for the purpose of s. 2(6A)(e). At the assessee's request the Tribunal included in the same reference the further question whether the Tribunal was right in holding that Rs. 18,950 constituted accumulated profits for the purposes of s. 2(6A)(e). The High Court answered both the questions in favour of the respondent. On appeal, the Supreme Court held (headnote) :

'(i) that the accumulated profit for the purposes of s. 2(6A)(e) did not include the current profits for the period ending March 31, 1959; (ii) that the Tribunal was not competent to refer the second question at the instance of the respondent on an application filed by the Department and the reference of that question must be considered to be void. The question raised by the respondent, viz., whether the provision of Rs. 11,000 for tax and Rs. 6,900 for dividend could be taken into account while determining the accumulated profit as at March 31, 1958, was not related to the question raised by the Department, viz., whether accumulated profits could take in current profits. The two questions involved the grant of separate and distinct reliefs and the decision of one did not affect the decision of the other.'

60. On the above conspectus, we are inclined to hold that when a question is raised before the Tribunal, and is either dealt with or failed to be dealt with, or considered but abandoned as unnecessary, must be deemed to have been dealt with by it, and is, therefore, one arising out of its order. Secondly, where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal. It is, therefore, manifest that the aspect of 'diversion of income by overriding title' can be canvassed by the assessee before this court as its is fairly implicit in the question referred to by the Tribunal, nay, it is one of the facets of the same question, and since in particular, it requires no additional facts for due adjudication, the same can be allowed to be raised. In fact, this aspect has been referred to in paragraph 5 of the statement of the case wherein it is stated :

'It was further argued that the agreement entered into by Shankaraiah with his two minor sons represented by their mother brought about a 'body of individuals' with a common purpose of producing income. He further urged that if in cases of superior title arising out of the transactions the 'body of individuals' emerges and that being a unit of assessment it has to be assessed as such.'

61. Again, in the order of the Tribunal it was specifically adverted to as under :

'It is true, as argued by Mr. Anjaneyulu, that by virtue of the agreement entered into between the parties there was an overriding obligation on Shankaraiah and a superior title in favour of the two minors in respect of their share of profit. But as Mr. Joshi argued even in such circumstances there could be a 'body of individuals' emerging out and they should be treated as a separate assessable entity, we feel that the matter that has to be decided is whether on the facts and in the circumstances of the case, there is a 'body of individuals' liable to be assessed as an assessable entity.'

62. The Tribunal further observed :

'That apart, even without the specific agreement entered into by the parties Shankaraiah would be under an obligation to pass on the share income to the divided members as per the partial partition'.

63. Eventually, it was held by the Tribunal that it was unnecessary to decide the appeal on the basis of the first contention raised by Mr. Anjaneyulu, viz., that there was a superior title or overriding obligation, inasmuch as it was found that the unit of assessment as a 'body of individuals' does not exist in this case.

64. Hence we unhesitatingly hold that this point must be deemed to have been dealt with by the Tribunal and consequently it arises out of its order, which forms part of this reference.

65. Diversion of income of overriding title :

66. After adjudicating the preliminary objection raised by the Revenue, we are now faced with the proposition, whether by agreement dated October 26, 1963, Shankaraiah agreed to hold the share of 24% in the firm in his individual name subject to the obligation that the income corresponding to the share of 6% pertaining to each of his two minor sons shall be paid to them.

67. Before answering, the case-law cited may be adverted to.

68. In Charandas Haridas v. CIT : [1960]39ITR202(SC) , C was the karta of a Hindu undivided family consisting of his wife, S, his three minor sons and himself. He was a partner in six managing agency firms and the share of the managing agency commission received by him as such partner was being assessed as the income of the family. On December 31, 1945, C, acting for himself and his minor sons, and his wife, S, entered into an oral agreement of a partial partition, by which the gave his daughter a one pie share on the commission from each of two of the managing agencies and the balance in those agencies and the commission in the other four managing agencies were divided into five equal share between C, his wife and his sons. This agreement was to come into effect on January 1, 1946. On September 11, 1946, C, acting for himself and his sons, and his executed a memorandum of partial partition recording the oral agreement of partition and the particulars of the division. The memorandum recited that the parties had decided that commission which accrued from January 1, 1946, ceased to be joint family property and that each became absolute owner of his share. The Appellate Tribunal held that by the document in question, the division, if any, was of the income and not of the assets from which the income was derived, inasmuch as 'the agreements of the managing agency with the managed companies did not undergo change whatever as a result of the alleged partition', the assets remained joint and the income remained the income of the joint family. The Bombay High Court affirmed that finding.

69. On appeal : (headnote)

'Held, that the fact of a partition in Hindu law might have no effect upon the position of the partner, in so far as the law of partnership was concerned, but it had full effect upon the family in so far as the Hindu law was concerned. Just as the fact of a karta becoming a partner did not introduce the members of the undivided family into the partnership, the division of the family did not change the position of the partner vis-a-vis the other partner or partners. The income-tax law before the partition took note, factually, of the position of the karta, and assessed him not as partner but as representing the Hindu undivided family. In doing so, the income-tax law looked not to the provisions of the Partnership Act, but to the provisions of Hindu law. When once the family had disrupted, the position under the partnership continued as before, but the position under the Hindu law changed. There was then no Hindu undivided family as a unit of assessment in point of fact, and the income which accrued could not be said to be that of a Hindu undivided family. There was nothing in the Indian Income-tax law or the law of partnership which prevented the members of a Hindu joint family from dividing any asset. Such division must, of course, be effective so as to bind the members; but Hindu law did not further require that the property must in every case be partitioned by metes and bounds, if separate enjoyment could otherwise be secured according to the shares of the members. For an asset of the kind in this case there was no other mode of partition open to the parties if they wished to retain the property and yet hold it not jointly but in severally, and the law did not contemplate that a person should do the impossible. The family took the fullest measure possible for dividing the joint interest into separate interests. The document, not being a pretense and being genuine, was fully effective between the members and there was partially no Hindu undivided family in respect of those assets. The document effectively divided the income. There was, therefore, no material to justify the finding that the income in the share of the managing agency commission was the income of the Hindu undivided family.'

70. In AddI. CIT v. Chandulal C. Shah : [1977]107ITR91(Guj) three brothers, C, N and R, were partners in a firm, each of them as representing his HUF. On January 10, 1961, there was a partial partition as regards the investment made by the respective families of each of the assessees in the firm as well as regards the business which was carried on by the firm. The family of C had to its credit the total amount of Rs. 92,978.41 as deposit in the firm. This amount stood distributed to the credit of different members of the family. As a result of this partition, it was agreed that the assessee, C, his wife, his major son and his three minor sons would each have 1/6th share in the business share of 0-3-3 in the firm which had belonged to C's family. It was found that it was not possible to partition this share of 0-3-3 in the business of the firm and, therefore, the parties to the partition agreed that the assessee, C, should continue to represent them (i.e. the wife and sons) in the firm. It was further agreed that the assessee should receive the share of 0-3-3 from the income of the firm as a representative of the other members of the family and, should, thereafter, distribute the respective shares of the members of the family to each of them as stipulated in the deed of partition It was also stated in the document that C agreed to receive the said share of profits of the firm as an agent of the members of his family and agreed to distribute and hand over their respective share profits as stipulated. The facts relating to the other two brothers were similar. While making the assessment for the assessment year 1963-64, the ITO thought that there was a sub-partnership between C and his family members by virtue of the abovesaid stipulations and that, therefore, the provisions contained in s. 64 (i) and (ii) of the I.T. Act, 1961, were attracted and, accordingly, brought the 5/6ths share of C's wife and sons also to tax in the hands of C. On appeal, the AAC held that by an overriding title, 5/6ths share of profits from the firm was, by virtue of the deed of partition, diverted to others and, as such, the assessee, C, should have been taxed only on 1/6th share of the said profit. The majority of the Appellate Tribunal agreed with the ACC. On a reference, the Revenue contended for the view taken by the Income-tax officer (headnote) :

'Held, that the stipulations in the deed of partition did not contain anything which was suggestive of the relationship of partnership between the members of the family. If the document of the partition is taken to be also an agreement creating a sub-partnership between the members of the family, then the minors who were the parties to the document would become full-fledged partners in the so-called sub-partnership, a situation which is patently illegal, because no minor can legally enter into a partnership agreement. In fact, the relevant portion of the document does not speak of any partnership at all. In fact, it had been found that the minors had actually shared the losses. There could be cases where both the elements, namely, (1) sharing of profits, and (2) creation of agency, are in existence with regard to some persons who are parties to the arrangement and yet intention to create partnership is found to be lacking because of the fact that the remaining persons are not legally capable of entering into a partnership agreement. The present is such a case.'

71. In CWT v. J.K.K. Angappa Chettiar : [1979]116ITR456(Mad) as a result of a partition on March 31, 1961, between the assessee and his two minor sons, the capital account of the HUF, of which the assessee was the karta, in various partnership firms are equally divided between the assessee and hi two sons. This partition was accepted and an order under s. 25A of the Indian I.T. Act, 1922, was also placed by the ITO. The claim of the assessee in his wealth-tax assessments that as two-thirds of the capital in the various partnerships belonged to the minor sons, two-thirds of the share of profits from the various firms also belonged to them was negatived by the WTO who held that after partition according to the terms of the partition deed the sons had no further interest in the partnership business and hence the entire share of the profits belonged exclusively to the assessee. This view was confirmed by the ACC. The Tribunal, however, held that the profits, assets, accretion and investments made out of the profits from the partnership firms attributable to the minor's share cannot be considered as the wealth of the assessee and consequently upheld the assessee's claim. On a reference to the High Court at the instance of the Department (headnote) :

'Held, that the assessee had been receiving his share of profits on behalf of the HUF and when partition took place the HUF ceased to exist and the parties held the investment as tenants-in-common and were entitled to the profits arising therefrom in accordance with their shares. On and from the date of the partition the karta becomes liable to render an account of the profits and the liability to such account is that of a trustee or agent. The provision of the partition deed relied on by the Revenue dealt only with the liability of the assessee for anything he does after the partition and not with the profit arising from the investment of the family funds already made. Therefore, on and from the date of the partition, the assessee was not entitled to the profits in its entirety but was entitled to only that portion of the profit referable to his share in the capital investment and the minors were entitled to the profits referable to their shares. Accordingly, the share of future profits from the vested in the assessee wholly and exclusively and hence the profits attributable to the interest of the minor sons in the various partnerships cannot be treated as the wealth of the assessee but will have to be treated as the wealth of the minors.'

72. In CIT v. Ram Narain it was held that it is fundamental principle of the law of partnership that the relation of partnership arises from contract and not from status. It was held further (headnote) :

'It is clear in law that as a consequence of partition between the members of an HUF, each member of the HUF gets the share in his own right. The assessee who was the karta of HUF consisting of himself, his wife and three sons, became a partner in a firm having 1/4th share in his capacity as karta. On November 15, 1965, there was a partial partition in the family as a result of which the 1/4th share in the firm was divided equally between the five members of the family, each taking an 1/5th share. A memorandum of partition was drawn up on November 8, 1966, according to which the capital standing to the credit of the family in the books of the firm was also divided into five shares and thenceforward the amounts which fell to the shares of the four members other than the assessee were treated as loans from them.'

73. Conclusion : Just as the fact of a karta becoming a partner did not introduce the members of the undivided family family in the partnership, the division of the family did not change the position of the partner vis-a-vis the other partner or partners. The income-tax law before the partition took note, factually, of the position of the karta and assessed him not as a partner but as representing the HUF. When once the family had disrupted, the position under the partnership remained as before, but the position under the Hindu law changed. Then there was no HUF as a unit of assessment. For an asset of the kind in this case, there was no other mode of partition open to the parties if they wished to retain the property and yet hold it not jointly but severalty. The documents being genuine, the family took the fullest measure possible for dividing the joint interest into separate interest. So, there was practically no HUF in respect of the assets of the firm. The documents effectively divided the income. In fact, the agreement created an overriding obligation on Shankaraiah to make over the income in favour of the minors and, therefore, the income corresponding to the share of each minor right from inception accrued to each minor creating thereby superior title in favour of the minors.

74. Even in the light of this aspect, is cannot be said that the arrangement so made would bring about any common interest of income-producing activity, one of them acting for the benefit of all, so as to constitute a 'body of individuals'.

75. Summing up : (1) There is no strait-jacket formula as to what constitutes a 'body of individuals' and any attempt may defy solution.

(a) The expression 'body of individuals' cannot be said to include a combination of individuals who merely receive income jointly without anything further as in the case of co-heirs inheriting shares or securities. But, it could be said to include a 'combination of individuals who have a unity of interest but who are not actuated by a common design and one or more of such individuals produce or help to produce income for the benefit of all'.

(b) The word 'person' in s. 2(31) includes a conglomeration of individuals who carry on some activity with the object of earning income. The words 'body of individuals' derive colour from the context in which they occur.

(c) A 'body of individuals' need not necessarily be the result of an agreement, arrangement or design; it might arise out of a certain situation. Though a body of individuals is not identical with an association of persons, they have some similarities. An association of persons may consist of non-individuals but a body of individuals has to consist only of individuals or human being. A mere collection of individuals without a common tie or common aim, cannot be taken to be a 'body of individuals'.

(2) In our undoubted view Shankaraiah will be holding the income received by him as a constructive trustee under ss. 81, 90 and 94 of the Indian Trusts Act, in favour of the two minors for whose benefit he holds it. Looking from this angle also, it cannot be held that Shankaraiah and the two minors constitute a 'body of individuals'.

(3) We are inclined to hold that when a question is raised before the Tribunal, and is either dealt with or failed to be dealt with, or considered but abandoned as unnecessary-must be deemed to have been dealt with by it, and is, therefore, one arising out of its order. Secondly, where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal. It is, therefore, manifest that the aspect of 'diversion of income by overriding title' can be canvassed by the assessee before this Court and it is fairly implicit in the question referred to by the Tribunal, nay it is one of the facets of the same question and so, can be allowed to be raised.

(4) We have no hesitation in holding that the agreement created an overriding obligation on Shankaraiah to make over the income in favour of the minors and, therefore, the income corresponding to the share of each minor right from the inception accrued to each minor creating thereby superior title in favour of the minors.

76. In the result, the question under reference in answered in the negative and in the favour of assessee.


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