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Deccan Wine and General Stores Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 101 of 1970
Judge
Reported in[1977]106ITR111(AP)
ActsIncome Tax Act, 1961 - Sections 2(31)
AppellantDeccan Wine and General Stores
RespondentCommissioner of Income-tax
Appellant AdvocateT. Ramachandrarao, Adv.
Respondent AdvocateP. Rama Rao, Adv.
Excerpt:
.....- plea of ascertaining three persons as individuals instead of assessment being made on status of 'body of individuals' - individuals have common interest in business - 'association of person' not constituted as claimed by assessee because two of them are minors - guardian is third person representing all of them - though business not carried on pursuant to common design but carried for common benefit by one representing all - held, three individuals in given circumstances clearly constitute 'body of individuals'. - - ramachandrarao, learned counsel for the assessee, submitted that on the same principle these three individuals would not constitute a body of individuals, which expression, according to him, should be construed ejusdem generis with the expression 'association of..........assessed as individuals. the income-tax officer 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 income-tax officer was confirmed by the appellate assistant commissioner and the income-tax appellate tribunal. at the instance of the assessee the tribunal has referred to us the following question : 'whether, on the facts and in 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' ?'2. before us, it was common ground that the mother and the two minor children would not constitute an 'association of persons' since it could not in law be said that these three individuals.....
Judgment:

Chinnappa Reddy, J.

1. Late Pannalal, apart from owning immovable properties with which we are not concerned, ran certain businesses known as 'Deccan Wine and General Stores', 'Moti Wine and General Stores' and 'Tina's Bar and Hotel'. Pannalal died in 1959 and his heirs, his widow and two minor children succeeded to the three businesses. For the assessment years 1959-60 and 1960-61, assessments in respect of the income from the three businesses were made as if the assessee's collective status was that of an 'individual'. For the assessment years 1961-62, 1962-63 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 assessments 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 businesses. 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 Income-tax Officer did not accept the plea that the three persons should be separately assessed as individuals. The Income-tax Officer 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 Income-tax Officer was confirmed by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. At the instance of the assessee the Tribunal has referred to us the following question :

'Whether, on the facts and in 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' ?'

2. Before us, it was common ground that the mother and the two minor children would not constitute an 'association of persons' since it could not in law be said that these three individuals had joined together in a common purpose or a common action with a view to produce income, profits or gains. Sri T. Ramachandrarao, learned counsel for the assessee, submitted that on the same principle these three individuals would not constitute a body of individuals, which expression, according to him, should be construed ejusdem generis with the expression 'association of persons'. In fact, according to Sri Ramachandrarao, the category of 'body of individuals' was added to the other categories of persons assessable to income-tax by the 1961 Act, with a view to more accurately describe co-executors, co-trustees and the like who, while they possessed unity of title and interest, could not be said, without strain on the language, to have joined together with a common design to produce income.

3. Section 3 of the Indian Income-tax Act of 1922 listed the units chargeable to income-tax. It mentioned an 'association of persons' but not a 'body of individuals'. In the Income-tax Act of 1961, income-taxis levied on a person and 'person' is defined in Section 2(31) by an inclusive definition which includes, among other categories, the category of 'an association of persons or a body of individuals, whether incorporated or not'. Thus a 'body of individuals' is brought in and placed alongside 'an association of persons'. The juxtaposition of the two expressions does suggest that the expression 'body of individuals' should be interpreted ejusdem generis with the expression 'association of persons'. But, naturally, the interpretation should not be so as to destroy the separate identity of the expression 'body of individuals'. The expression must have a distinct meaning of its own; otherwise Parliament would not have introduced it. It may have some characteristics common with 'an association of persons' but it cannot be the same thing as an association of persons, or, as contended by the learned counsel, a mere species of 'association of persons' which is better described as 'a body of individuals'.

4. The learned counsel read to us a passage from 'The Law and Practice of Income Tax by Kanga and Palkhivala (sixth edition), where the learned authors have said :

'The words 'body of individuals', placed in the same clause in juxtaposition with 'association of persons', were not in the 1922 Act. Since 'association of persons' contemplates persons joining in common action with the object of producing income, presumably the words 'body of individuals' were introduced as being more appropriate to describe the status of persons like executors who merely receive jointly income such as dividends and who may be assessable jointly as representing the estate, or co-trustees who may likewise merely receive income jointly and be assessablein the like manner and to the same extent as the beneficiaries individually. In such cases, the new and more accurate label or status of 'body of individuals' would not enhance or in any way affect the tax liability. Co-executors or co-trustees may be assessed as a body of individuals because their title and interest is indivisible.'

5. We do not agree with the learned authors that the expression 'body of individuals' was introduced to more appropriately describe the status of persons like co-executors and co-trustees. There is no warrant for placing any such restrictive interpretation on a broad expression like 'a body of individuals'. The principle of ejusdem generis does not justify it. The other provisions of the Act are against it. For example, Section 86(v) provides that income-tax shall not be payable by an assessee, if the assessee is a member of an association of persons or a body of individuals other than a Hindu undivided family, a company or a firm, in respect of any portion of the amount which he is entitled to receive from the association or body on which income-tax has already been paid by the association or body. There can never be any question of a co-executor or a co-trustee being entitled to receive any amount from the body of co-executors or co-trustees. Section 86(v) can never apply to a co-executor or a co-trustee. If the expression 'body of individuals' is given the restricted meaning suggested by the learned authors and the learned counsel, it is hard to imagine a case of 'a body of individuals' to which Section 86(v) applies. In the light shed by Section 86(v), it bebomes 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'. (Vide Hotz Trust v. Commissioner of Income-tax [1930] 5 ITC 8 , Nagore Durgah (Trustees of) v. Commissioner of Income-tax : [1954]26ITR805(Mad) , Commissioner of Income-tax v. Ibrahimji Hakimji [1940] 8 ITR 501, Raghavulu Naidu (V.M.) & Sons v. Commissioner of Income-tax : [1950]18ITR787(Mad) and Estate of Chockalingam Chettiar v. Commissioner of Income-tax : [1960]40ITR429(Mad) . There was hardly any need to introduce the expression 'body of individuals' merely to cover cases already held to be covered by another expression.

6. In order to understand what Parliament meant by the expression 'body of individuals', it is necessary to understand the meaning of; the expression 'association of persons'. The expression 'association of persons' is not defined in the 1961 Act. It was not defined under the 1922 Act. But it was interpreted by judges. In the case of B. N. Elias, In :re : [1935]3ITR408(Cal) , Derbyshire CJ. referred to the Oxford Dictionary, where the meaning of the word 'associate' is given as 'to join in common purpose, or to join in an action' and proceeded to pose the question, 'Did these individuals join in a common purpose, or common action, thereby becoming an association of individuals ?' In Commissioner of Income-tax v. Lakshmidas Devidas : [1937]5ITR584(Bom) , Beaumont C J. accepted this view and applied it to a case where one of the members of the association was a minor who was represented by his father as natural guardian. In Dwarkanath Harischandra Pitale, In re : [1937]5ITR716(Bom) , Beaumont C.J. extended the principle to a case where though the original association was not a voluntary act on the part of the members, they elected to retain the property and manage it as a joint venture producing income. The Supreme Court in Indira Balkrishna's case : [1960]39ITR546(SC) approved these three decisions and said :

'Therefore, an association of persons must be one in which two or more persons join in a common purpose or a common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains.' The Supreme Court also expressed the following words of caution : 'It is, however, necessary to add some words of caution here. There is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an association of persons within the meaning of Section 3; it must depend on the particular facts and circumstances of each case as to whether the conclusion can be drawn or not.'

7. The facts of that case were that three widows jointly inherited the estate of their husband which consisted of immovable properties, shares in companies, deposits and a share in a registered firm. In respect of the income from immovable properties, the provisions of Section 9(3) of the Income-tax Act, 1922, expressly prohibited the three widows from being treated as an association of persons. With regard to the remaining items of income there was no finding by the fact-finding authorities that the three widows had combined in a joint enterprise to produce income. All that the widows had done was not to exercise their right to separate enjoyment. In respect of the shares and deposits, except for receiving the dividends and interest jointly, they had done no act which had produced or helped to produce income. On those findings the Supreme Court said that the three widows were not an association of persons within the meaning of Section 3 of the Income-tax Act, 1922.

8. In M. M. Ipoh v. Commissioner of Income-tax : [1962]46ITR301(Mad) the question arose whether an association of persons could consist of a father and his minor son. The learned judges held that there was no baragainst a single adult and a minor constituting an association of persons if the minor was properly represented in his dealings as a member of the association. Where, however, the only adult member happened to be the minor's father and guardian, the learned judges thought it could not be said that the father as an individual agreed with the father as guardian of the minor son to constitute an association of persons.

9. It is, therefore, clear that 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. They must combine to engage in such an activity; the engagement must be pursuant to the combined will of the persons constituting the association; there must be a meeting of the minds, so to speak. In a nutshell, there must be a common design to produce income. If there is no common design, there is no association. Common interest is not enough. Production of income is not enough. This interpretation of the expression 'association of persons' flows from the meaning of the word 'association'. When the word 'association' is replaced by the word 'body', it must follow that the feature of common design or combined will so peculiar or distinctive to an association of persons is not a characteristic of a body of individuals. The absence of a common design is what principally distinguishes a body of individuals from an association of persons. Another distinguishing feature is that the one refers to persons and the other to individuals. A person, by definition, includes an individual. But an individual, apparently, does not include a person. Under the 1922 Act, there was some controversy whether the word 'individual' meant a natural person, i.e., a human being only or whether it included an artificial juridical person. In the present Act an artificial juridical person is placed in a special category in Section 2(31)(vii). Presumably, an individual under the new Act means only a human being. These are the features which distinguish 'body of individuals 'from' association of persons'. The two expressions are placed alongside each other in Section 2(31)(vii) because of the common characteristics possessed by them ; both deal with combinations, whether of persons or individuals, who have a common interest and who are engaged in income producing activity.

10. 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 produce or help to produce income for the benefit of all. We are content to leave it at that. We will not attempt a comprehensivedefinition; nor will we attempt to catalogue the characteristics of a body of individuals. There is danger in doing either.

11. Sri Ramachandra Rao relied upon the decision of the Supreme Court in Commissioner of Gift-tax v. R. Valsala Amma : [1971]82ITR828(SC) . That was a case under the Gift-tax Act. Section 2(xviii) of the Gift-tax Act defines a person as including a 'Hindu undivided family or a company or an association or a body of individuals or persons, whether incorporated or not'. The facts were that a mother bequeathed to her two daughters 'a cinema theatre building with machinery' and another building described as police quarters. The two daughters gifted the building to their brother. The question arose whether gift-tax should be assessed treating the two ladies as an association or a body of individuals or as distinct individuals. The Supreme Court held that the property was received by the two ladies as tenants-in-common, each had a definite half share and each must, therefore, be considered to have gifted her half share of the property. They did not make the gift as an association or a body of individuals. We do not think that the case is of any assistance. It is commonplace in the interpretation of statutes that the same word or expression occurring in different statutes or in different parts of the same statute need not mean the same thing. The word or expression must take its colour from the context. More so in the labyrinth of taxing statutes. We are not concerned with a body of individuals in the abstract. We are concerned with 'a body of individuals' in the context of the Inccme-tax Act which is different from 'a body of individuals' in the context of the Gift-tax Act. The considerations which determine whether a gift is made by a body of individuals are obviously different from the considerations which determine whether income has accrued or is deemed to accrue to a body of individuals. Further, in the case before the Supreme Court the subject-matter of the gift was property, i.e., buildings and not businesses. If the subject-matter of the gift was a running business carried on by the two ladies, perhaps the position might have been different. For example, if the ladies were carrying on cinema business and had gifted both the theatres and the business it might perhaps have been possible to argue that while the building was gifted by the ladies as individuals, the business was gifted by them as a body of individuals. That, however, was not the position.

12. In the present case, the three individuals have a common interest in the businesses. The businesses are 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 their behalf with the third person. But, though the businesses are not carried on pursuant to acommon design, they arc 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. The assessee will pay the costs of the reference. Advocate's fee Rs. 250.


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