SAMBASIVA RAO - The question that was referred for our decision is :
'Whether, on the facts and in the circumstances of the case, the income from the leasing out of the mill building and machinery was rightly assessed in the hands of an association of persons ?'
This is reference under section 66(1) of the Indian Income-tax Act, 1922, which will be hereinafter referred to as the Act.
The assessment year is 1958-59 for the which the accounting period was the year ended 31st December, 1957. The assessment was made by the department treating the assessee as an association of persons.
Originally there was a Hindu undivided family consisting of a father and six sons. A partition of the family took place on December 10, 1955, and one of the assets included in the partition was Sri Mahalakshmi Boiled Rice and Oil Mill at Ullamparru. The said mill consisted of lands, buildings, machinery, etc. Though it could not be, and was not, divided by metes and bounds between the seven members of the family, each one of them was allotted and became entitled to 1/7th share in it. One of the sons was a Government servant. The father and the remaining 5 sons constituted themselves into a firm, took the mill, that is, the buildings, machinery, etc., on lease from the seven members and ran the business of the rice and oil mill. There was no written lease agreement. It is also stated before us, and it is not defined by the department, that the rent was paid by the firm to the 7 co-owners, i.e., the father and the 6 sons, by 1/7th share of the rent being separately credited to the individual accounts of the 7 co-owners. The Income-tax Officer, however, assessed the rent in the hands of the 7 members in the statute of an association of persons at Rs. 14,715.
Aggrieved by such assessment, the assessee went up on appeal to the Appellate Assistant Commissioner and his contention there was, as it was before the Income-tax Officer, that the income from the leasing out of the building and machinery should not have been assessed in the hands of an association of persons, but should have been assessed separately in the hands of the 7 co-owners. The Appellate Assistant Commissioner did not accept this contention of the assessee and rejected the appeal. The further appeal to the Appellate Tribunal met with the same fate of dismissal. The Tribunal also thought that the department was right in holding that the income was the income of an association of persons and in assessing it accordingly. Thereupon, the assessee required the Appellate Tribunal to refer the matter to this court and accepting the same the Tribunal referred the above-mentioned question to this court.
Sri Anantha Babu, learned counsel for the assessee, contended that the department was wrong in charging income-tax against the assessees as an association of persons in view of the fact that the 7 co-owners of the property have definite and ascertainable shares in the mill. They should have been assessed individually in respect of their separate shares of the income derived by letting out the mill. Sri Venkatappa, who appeared for Sri Kondaiah, the learned counsel for the department, on the other hand, argued that the department was right in treating the assessees as an association of persons because it is clear from the circumstances of the case that the 7 individuals joined in a common purpose with the object of producing income.
In order to judge the relative merits of these contentions, it would be useful to notice the relevant provisions of the Act.
Section 3 of the Act is the charging section which lays down that :
'Whether any Central Act enacts that income-tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm o the members of the association individually.'
The Act, however, does not define 'association of persons'.
Section 9 of the Act is the section which provides for levying of tax on income from property. Section 9(1) of the Act provides that the tax shall be payable by an assessee under the head 'income from property' in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him, the profits of which are assessable to tax and makes the levy of tax subject of certain allowances enumerated therein. Sub-section (3) of section 9 of the Act specifically lays down that :
'Where property is owned by two or more persons and their respective shares ar definite and ascertainable, such persons shall not in respect of such property be assessed as an association of persons, but the share of each such person shall be included in his total income.'
In view of these provisions, it is clear that where a property is owned by two or more persons and their respective shares are definite and ascertainable, the co-owners should not be assessed in respect of their income from such property as an association of persons but each co-owner must be assessed individually in respect of his share of income. When property is owned by two or more persons, the important test is to examine whether their respective shares are 'definite and ascertainable.' If they are so definite and ascertainable, such persons shall not, in respect of such property, be assessed as an association of persons. The share of each such person in the income from the property can only be included in his total income. To read something more into this provision and more requirements and criteria is t add some more words, which are not present in the sub-section. It would be pertinent to note that sub-section (3) was not in the original Act, but was added by the Income-tax (Amendment) Act, 1939 (Act VII of 1939). It was obviously added to give relief to co-owners-assessees whose shares in the property are definite and ascertainable. Therefore, if any assessee comes under the purview of sub-section (3) of section 9 of the Act, he would certainly be entitled to its benefits.
Now, the question is whether in the present case the assessee come within the scope of sub-section (3) of section 9 of the Act. In other words, we have to see whether their shares are definite and ascertainable in the mill, the income by way of rent of which is now sought to be assessed. The findings of the Tribunal and the lower authorities in this regard are, to our mind, clear. The Tribunal has found that :
'The admitted fact is that the asset (the mill) formerly belonged to the Hindu undivided family. On the partition of the asset, each member of the family came to own a definite share in the asset. This asset, however, was not used by the seven of them, but it was used by a distinct and separate entity of six of them constitution a firm to whom it was leased.'
In the partition that took place between the assesses the mill was also divided. Though it was not divided by mets and bounds between the various members and it was also not possible to do so, each member came to own a 1/7th share in it. It was also found by the Tribunal that, since one of the sons was a Government servant, only the other six members of the family constituted themselves into a firm and took the mill on lease from all the 7 owners. Thus, the lessee-firm consisting of six partners became a different and distinct entity from the 7 co-owners of the mill, though the partners of the lessee-firm were also six of the co-owners of the mill. It was also asserted on behalf of the assessee and admitted on behalf of the department, before us, that a regular order under section 25A of the Act was passed by the department recognising the partition. Section 25A of the Act says that, if the Income-tax Officer is satisfied that the joint family property has been partitioned among the members or groups of members, in definite portions, he shall record an order to that effect. When that was done, the factum of partition of the 7 erstwhile coparceners holding the property as co-owners cannot be questioned. The factum of partition has become final and cannot any further be questioned. It was also asserted before us by the learned counsel fort the assessee that the rent paid by the lessee-firm was being credited in the accounts to the 7 co-owners separately with the amounts representing their respective 1/7th shares of the total rent. In view of these findings and undisputed facts we cannot but hold that the respective shares of the 7 co-owners in the mill are definite and ascertainable and that, therefore, they come within the purview of sub-section (3) of section 9 of the Act.
The learned counsel appearing for the department, however, placed strong reliance on the Supreme Court decision in Commissioner of Income-tax v. Indira Balkrishna to contended that these assessees who are 7 in number leased the mill jointly to the lessee-firm there by joining in a common purpose or common action with the object of producing income, profits or gains and thus became liable to be assessed as an association of persons. The learned counsel for the assessee also relied upon this decision in support of his contention that the assessees should be individually assessed in respect of their 1/7th shares of the rent. That is a case where three widows of a Hindu, governed by the Mitakshara law, inherited the estate of the husband, which consisted of immovable properties, shares in joint-stock companies, moneys lying in deposit and a share in a registered firm. The question in that a case was whether the three widows could be assessed in the status of an 'association of persons' within the meaning of section 3 of the Income-tax Act in regard to the income derived from the properties inherited by them. On reference, the High Court held that they could not be assessed as an association of persons. On appeal the Supreme Court also held :
'(i) That the co-widows succeeded as co-heirs to the estate of their deceased husband and took as joint tenants with rights of survivorship and equal beneficial enjoyment; they were entitled as between themselves to an equal share of the income. Though they took as joint tenants, no one of the had a right to enforce an absolute partition of the estate against the others so as to destroy their right of survivorship. But they were entitled to obtain a partition of separate portions of the property so that each might enjoy her equal share of the income accruing therefrom.
(ii) that section 9(3) of the Income-tax Act applied in regard to the income from the immovable property, since they had an equal share in the income.
(iii) That, as there was no finding that the three widows had combined in a joint enterprise to produce income and as they had done no act which had helped to produce the income, it could not be held that they had the status of an association of persons within the meaning of section 3 of the Income-tax Act.'
It is to be noted that in this case before the Supreme Court, the widows took the properties as joint tenants and no one of them had a right to enforce an absolute partition of the estate against the other co-widows, so as to destroy their right of survivorship, though they were entitled to obtain partition of separate portions of property, so that each might enjoy her share of the income therefrom. Even in those circumstances the Supreme Court held that section 9(3) of the Act applied in regard to the income from the immovable property since the co-widows had an equal share in the income. The present case before us is a much stronger case. The father and six sons actually divided their properties including the assets of the mill. That partition was recognised by the department under section 25A of the Act. They now hold the property as only co-owners or tenants-in-common. Each co-owners 1/7th share in the property is definite and ascertainable and each one of the 7 shares was receiving his 1/7th share of the rental income separately. Under the circumstances, we have no doubt whatever, that the principle laid down by the Supreme Court in this decision could support the assessee in his contention that section 9(3) of the Act is attracted and governs the case of the assessees.
Stress was, however laid on behalf of the department on the observation of the Supreme Court at page 551 that :
'... an association of persons must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains.'
The Supreme Court also approved the principle paid down by Costello J. in In re B. N. Elias that :
'It may well be that the intention of the legislature was to hit combinations of individuals who were engaged together in some joint enterprise but did not in law constitute partnerships..... when we find,..... that there is a combination of persons formed for the promotion of joint enterprise..... then I think no difficulty whatever arises in the way of saying that..... these..... persons did constitute an association.....'
It was the contention put forward on behalf of the department that since the seven co-owners had jointed together in leasing out the mill, it must be deemed that they constituted an association, which functions with the object of producing income. We cannot, however, accept this contention. The Supreme Court in the above decision stated at page 552, after approving the aforesaid observations of Costello J., that :
'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.'
As we have stated above, it is not possible, under the circumstances of the case as found by the Tribunal, to draw a conclusion that the 7 co-owners constituted an association of persons within the meaning of section 3. No doubt they entered into a single act of leasing out the property to the lessee firm. Instead of entering into seven separate agreements of lease, which would have been cumbersome under the circumstances, they entered into a single lease. The intention of the parties, it is obvious, is that they did not want to create a new association of lessors. The leasing out of the mill was only an act of ownership. Receipt of the rent separately is another clear indication of their intention to act separately is the exercise of their ownership of the mill. As has been graphically stated by Rowlatt J. in Graham v. Green at page 312 :
'But then there is no doubt that if you set on foot an organised seeking after emoluments which are not in themselves profits, you may create, by way of a trade or an adventure or a vocation, a subject matter which does bear fruit in the shape of profits or gains. Really a different conception arises, a conception of a trade or vocation which differs in its nature, in my judgment, from the individual acts which go to build it up, just as a bundle differs from odd sticks. You may say, I think, without perhaps an abuse of language, there is something organic about the whole which does not exist in its separate parts.'
As stated above, on the facts found by the Tribunal, we have no doubt whatever that there is no association of persons in this case, which does not exist in its separate parts and whose object it is to produce income, profits or gains. In this view we must answer the reference in the negative that the income from the leasing out of the mill, building and machinery cannot be assessed in the hands of an association of persons.
Though the question that has been referred to us does not include it. Sri Venkatappa, the learned counsel appearing for the department, also contended that income that was derived by the assessees by leasing out the mill was not really an income from property coming under section 9 of the Act, but was really an income from business coming under section 10 of the Act. Since this aspect was argued at length before us, we proceed to consider it also briefly, though it may not strictly arise in this reference.
A reading of the relevant provisions of section 9 and 10 of the Act will be useful in this context.
Section 9(1) of the Act says :
'The tax shall be payable by an assessee under the head Income from property in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto of which he is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him the profits of which are assessable to tax, subject to the following allowances...'
On the other hand, section 10(1) says :
'The tax shall be payable by an assessee under the head Profits and gains of business, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him.'
It is, therefore, to be examined whether the leasing out of the mill by the assessees was in the nature of a business, profession or vocation within the meaning of section 10(1) of the Act or the income that was derived by the assessees was merely income from property within the meaning of section 9(1) of the Act. In the light of the facts and circumstances of the case found by the Tribunal, there is no basis to think that the assessees conducted a business, profession or vocation within the meaning of section 10 of the Act. What the assessees did was only to let out the buildings and them machinery for the annual rent. An isolated transaction of leasing out the mill, which is nothing but an exercise of their right of ownership on the part of the assessees, cannot by any stretch of imagination be brought under the description 'business'. 'Business' can only mean a systematic or organised course of activity with the purpose of making a profit or gain. As has been observed by the Supreme Court in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax, the word 'business' connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. The Supreme Court in that case was considering whether the letting out of the plant, machinery, etc., would fall within the definition of business and held as follows :
'Applying also the common sense principle to the facts so found, it is impossible to hold that the letting out of the plant, machinery, etc., was at all a business operation when its normal business activity had come to a close. It is interesting to note that sub-sections (3) and (4) of section 12 of the Indian Income-tax Act recognise that letting out of plant, machinery, etc., may be a source of income falling under the head other sources within that section and not necessarily under the head business dealt with in section 10 of the Act. In the facts and circumstances of this case, therefore, the letting out of the plant, machinery, etc., cannot be held to fall within the body of the definition of business under section 2(5) of the Excess Profits Tax Act.'
It is to be noted that the first part of the definition of 'business' contained in section 2(5) of the Excess Profits Tax Act is the same as in section 2(4) of the Indian Income-tax Act.
A Bench of this court, of which one of us was a member, had occasion to consider this aspect in Tripurasundari Cotton Press Co. Ltd. v. Commissioner of Income-tax. There the assessee was a public limited company which carried on the business of cotton pressing and also owned a cotton press and other assets, viz., factory, buildings, godowns, machinery, etc. The assessee company stopped its business of cotton pressing in 1950, and resolved to let out the buildings and godowns and sell away the machinery. The factory, buildings and godowns were let out but the machinery was not yet sold during the relevant previous years. The Income-tax Officer assessed the income derived from the lease of the factory, buildings, godowns, etc., under the head 'income from property' while the assessee contended that it was 'income from business'. Their Lordships of the Division Bench held :
'... that as the business activity of the assessee ceased totally, the factory, buildings and godowns were not part of the business assets and the department was right in assessing the rent derived from the lease of the buildings and godowns, etc., under section 9 as income from property.'
Following these decisions we hold that the income is liable to be assessed and taxed only as income from property under section 9 of the Act and not as income from business under section 10 of the Act.
We, therefore, answer the reference in the negative and in favour of the assessee with costs of the assessee. Advocates fee, Rs. 250.