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Narayan Nepak Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtOrissa High Court
Decided On
Case NumberS.J. Case Nos. 239 and 240 of 1977
Judge
Reported in51(1981)CLT573; [1982]136ITR133(Orissa)
ActsIncome Tax Act, 1961 - Sections 2(31), 3, 4, 171 and 256(2)
AppellantNarayan Nepak
RespondentCommissioner of Income-tax
Appellant AdvocateA. Pasayat, Adv.
Respondent AdvocateStanding Counsel
Cases ReferredCommr. of Agrl. I.T. v. Raja Ratan Gopal
Excerpt:
.....devi, 1997(2) glt 406, approved. new india assurance co. ltd. v birendra mohan de, 1995 (2) gau lt 218 (db) and union of india v smt gita banik, 1996 (2) glt 246, are not good law]. - the first appellate authority accepted the argument and held that the shares of the other six members were effectively diverted by the deed of partition before they became the income of narayan. to our mind, the arrangement entered into by the seven members of the family by the deed of partition clearly indicated a common purpose or a common action with a view to produce profits and share them subsequently. he said :it may well be that the intention of the legislature was to hit a combination of individuals who were engaged together in some joint enterprise but did not in law constitute partnerships......following the partition, but it must be assumed that they had agreed to keep their share in the firm jointly and acted collectively to earn the profits. he, therefore, treated the status of narayan as an association of persons (aop) and brought to tax the entire share income received from the firm in the hands of the aop.4. the assessee challenged the status by filing an appeal before the aac and contended that the shares of the other six persons stood diverted at source before they reached narayan nepak and, therefore, the entire share income could not be assessed in the hands of the aop. the first appellate authority accepted the argument and held that the shares of the other six members were effectively diverted by the deed of partition before they became the income of narayan......
Judgment:

Misra, C.J.

1. On the assessee's application under Section 256(2) of the I.T. Act of 1961 (hereinafter referred to as 'the Act'), this court directed the Income-tax Appellate Tribunal, Cuttack Bench, to state a case and refer the following question for the opinion of the court :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the members of the family constitute an association of persons and are liable to be assessed in that status?'

2. The relevant assessment years are 1973-74 and 1974-75. The assessee, an individual, was previously assessed in the status of an HUF in respect of the share income earned by the joint family from a firm known as M/s. Sri Narayan Bastralaya. The previous year for the assessment year 1973-74 was the calendar year 1972 ending on December 31, 1972. On December 31, 1971, there was a partial partition in the HUF in respect of the interest of the family in the firm and as a result of such partition, each of the seven members of the family got 1/7th share in the hitherto HUF interest in the firm. In the course of the assessment for 1973-74, a claim for partial partition was made and the ITO accepted the claim by passing an appropriate order under Section 171 of the Act on 30th of March, 1974. The seven members of the HUF applied to be admitted as partners with individual status in the firm. That application was, however, refused. Therefore, in the books of the firm, the capital hitherto standing in the name of the HUF continued to stand in its name and the share of profit used to be credited to the single account as before.

3. The ITO held that there was no sub-partnership among the seven members of the erstwhile family and took the view that the income was earned jointly by all the members through Narayan Nepak. According to the assessing officer, each member became a separate entity following the partition, but it must be assumed that they had agreed to keep their share in the firm jointly and acted collectively to earn the profits. He, therefore, treated the status of Narayan as an association of persons (AOP) and brought to tax the entire share income received from the firm in the hands of the AOP.

4. The assessee challenged the status by filing an appeal before the AAC and contended that the shares of the other six persons stood diverted at source before they reached Narayan Nepak and, therefore, the entire share income could not be assessed in the hands of the AOP. The first appellate authority accepted the argument and held that the shares of the other six members were effectively diverted by the deed of partition before they became the income of Narayan. Accordingly he allowed the appeal and vacated the assessment in the status of AOP.

5. The revenue thereupon appealed to the Tribunal and maintained that the seven members of the erstwhile family formed an AOP after the partition, inasmuch as they allowed their individual shares to continue as before in the firm and had also decided to distribute the profits among themselves after they were received by Nepak. The Tribunal accepted the contention of the revenue and held :

'.....The arrangement was that the seven members voluntarily agreed to allow their individual funds to remain invested in the aforesaid firm with a view to earn profits therefrom and when profits were so earned to divide them equally amongst themselves. To our mind, the arrangement entered into by the seven members of the family by the deed of partition clearly indicated a common purpose or a common action with a view to produce profits and share them subsequently.'

It was further held :

'.....we, therefore, come to the conclusion that the seven members joined in a common endeavour in order to produce profits by allowing their individual capital to remain invested in the aforesaid firm. Their action indicated an endeavour for producing profits and later to share the same. Thus, in our opinion, the seven members of the family had formed an 'association of persons' within the meaning of Section 2(31)(v) of the Act. As such, they were liable to be assessed collectively in the status of an 'association of persons'.'

6. The Tribunal restored the assessment after vacating the decision of the AAC and when the assessee applied that a case may be stated, the Tribunal declined to do so.

7. Up to the previous assessment year 1972-73, the assessee, Narayan Nepak, was being assessed in the status of an HUF in respect of the share income earned in the firm. The ITO found that there was no partnership in existence following the partial partition ; income was earned combinedly by all the seven members through Narayan Nepak. Accordingly, the assessment was reopened and the ITO treated the assessee as an AOP. The term 'association of persons' has not been defined under the Act. As pointed out by the Full Bench in the case of J.V. Saldhana v. CIT [1932] 6 ITC 114 these words are not used in any technical sense, but must be construed in their plain, ordinary meening. When there is a combination of persons formed for the promotion of a joint enterprise, or otherwise stated, when co-adventurers are banded together for a common action, they are treated as an AOP when they do not constitute in law a partnership. Where the income does not result from any joint venture or joint act, assessment in the status of an AOP would not be justified : See CGT v. R. Valsala Amma : [1971]82ITR828(SC) . In order to constitute an 'AOP', the persons must join in a common purpose or common action and the object of the association must be to produce income and it is not enough that the persons received the income jointly. In the case of Commr. of Agrl. I.T. v. Raja. Ratan Gopal : [1966]59ITR728(SC) Subba Rao J., as the learned judge then was, spoke for the Supreme Court thus (p. 732):

'The collection of the entire income from the estate by one of the sharers or even by a common employee will not make that income an income from a joint venture.'

8. The ITO dealt with the matter of status by saying :

'It was contended by the authorised representative that as there was a partition in the HUF and the coparceners had agreed, vide written agreement to divide equally the share income earned by Sri Narayan Nepak from the firm, M/s. Narayan Bastralaya, each of the coparceners should be assessed on the 1/7th of his individual share income. But, as it has already been stated above, there is no deed of sub-partnership in existence to divide the share earned from the firm, M/s. Narayan Bastralaya. After partition of the family each coparcener became a separate entity and when they agreed to put their share from the HUF in the firm as a collective capital, the status has to be treated as an ' association of persons'.....'

9. As already pointed out, the AAC held in favour of the assessee while the Tribunal reversed the finding of the first appellate authority. Neither the ITO nor the Appellate Tribunal has recorded a clear finding that the share income from the firm which is the subject-matter of assessment was received as a result of a joint venture or joint act of the seven persons. Admittedly, there is no formal partneiship firm of the seven members. There is no clear finding as to the existence of an agreement to carry on a joint venture nor has it been found as a fact that though the accounts stood in the name of Narayan Nepak, the other six had as a fact joined in the venture. At the most, on the finding the position seems to be that the collection of the entire income which has been assessed was by Narayan Nepak as in previous years. From that fact alone, as pointed out in the case reported in Commr. of Agrl. I.T. v. Raja Ratan Gopal : [1966]59ITR728(SC) by the Supreme Court, there can be no presumption of a joint venture. On the material on record, therefore, the conclusion of the Tribunal that the assessee had been rightly treated as an AOP is not sustainable.

10. Counsel placed reliance on the decision of the Supreme Court in the case of CIT v. Indira Balhrishna : [1960]39ITR546(SC) where the meaning of the concept of 'association of persons' has been given. Das J., as the learned judge then was, spoke for the court thus (p 551) :

'It is enough for our purpose to refer to three decisions : In re B. N. Elias : [1935]3ITR408(Cal) Commissioner of Income-tax v. Laxmidas Devidas : [1937]5ITR584(Bom) and In re Dwarakanath Harischandra Pitale : [1937]5ITR716(Bom) . In re B. N. Elias, Derbyshire C. J. rightly pointed out that the word 'associate' means, according to the Oxford Dictionary, 'to join in common purpose, or to join in an action'. Therefore, 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. This was the view expressed by Beaumont, C.J. in Commissioner of Income-tax v. Laxmidas Devidas : [1937]5ITR584(Bom) , at page 589 and also in In re Dwarakanath Harischandra Pitale : [1937]5ITR716(Bom) . In In re B. N. Elias : [1935]3ITR408(Cal) Costello J. put the test in more forceful language. He said : 'It may well be that the intention of the Legislature was to hit a combination 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 a joint enterprise.....then I think no difficulty arises whatever in the way of saying that...these persons did constitute an association.....'

We think that the aforesaid decisions correctly lay down the crucial test for determining what is an association of persons within the meaning of Section 3 of the Income-tax Act, and they have been accepted and followed in a number of later decisions of different High Courts to all of which it is unnecessary to call attention. 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.

Learned counsel for the appellant has suggested that having regard to Sections 3 and 4 of the Indian Income-tax Act, the real test is the existence of a common source of income in which two or more persons are interested as owner or otherwise and it is immateria! whether their shares are specific and definite or whether there is any scheme of management or not. He has submitted that if the persons so interested come to an arrangement, express or tacit, by which they divide the income at a point of time before it emanates from the source, then the association ceases ; otherwise it continues to be an association. We have indicated above what is the crucial test in determining an association of persons within the meaning of section 3, and we are of the view that the tests suggested by learned counsel for the appellant are neither conclusive nor determinative of the question before us.'

11. In view of this decision of the Supreme Court, it is unnecessary to refer to some other cases placed before us at the Bar during the hearing of this matter. We have no difficulty in agreeing with the submission of the assessee's counsel that this has not been kept in view and the facts have not been analysed by applying the tests indicated by the Supreme Court. As we have already pointed out, there has been a finding that all the seven persons of the erstwhile joint family became owners of the capital that lay to the credit of the HUF which alone was the partner previously, but there is no clear finding with reference to the agreement entered into among them that they had any joint enterprise to undertake. In our view, on the facts found, the AAC was justified in holding that the status of the assessee was not an AOP and unless a clear finding came to satisfy both the tests, the Tribunal had no justification to reverse the finding of the AAC and restore the status of the assessee to that as determined by the ITO.

12. Our answer to the question referred, therefore, is :

On the facts and in the circumstances of the case, the Appellate Tribunal is not justified in holding that the members of the family constitute an association of persons and are liable to be assessed in such status.

13. There would be no order for costs.

J. K. Mohanty, J.

14. I agree.


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