JAGADISAN J. - One Mohamed Rowther of Muthupet in Tanjore district migrated to Penang in 1938 and carried on a lighterage business in the Penang Harbour. He married two wives in India, by whom he had nine children. For the sake of convenience, we would refer to them in this judgment as the Indian heirs. He also married a Malayan wife and had a son by her. This wife and son would be referred to in this judgment as the Malayan heirs. Mohamed Rowther had a successful business career, and, besides the lucrative business at Penang, he came to own large extent of house properties and agricultural lands in India. During his absence in Malaya, his son-in-law one Dawood Ghani, was managing the properties in India under a power of attorney. Mohamed Rowther executed his last will and testament on 9th August, 1943, and died on 17th August, 1943. His estate devolved upon the two Indian wives, their nine children, the Malayan wife and her only son. Under the will, he had, however, appointed three executors and trustees to administer the properties belonging to him until they were divided and distributed to his heirs-in-laws; and they were (1) Amir Mohideen, (2) Mohamed Noorudeen and (3) Sheik Ahmed. Penang was under Japanese occupation at the time of Mohamed Rowthers death and for some time thereafter. The executors obtained probate of the will from the Japanese court on 12th December, 1944. After the British re-occupation sometime in 1945, this probate was confirmed by the British court. All the three executors, however, did not take up the management of the estate of the deceased, Mohamed Rowther. It was only Amir Mohideen who appears to have carried on the lighterage business in his capacity as executor till it was taken over by the power of attorney agent of the Indian heirs on 18th December, 1946. The news of the death of Mohamed Rowther was received by the Indian heirs only after the British re-occupation in 1945. On 3rd September, 1945, the Indian heirs remitted a sum of $ 15,000 through the Indian Overseas Bank Ltd., to the executors to enable them to carry on the lighterage business. Hameed Sultan, the eldest son of the deceased Mohamed Rowther, and Dawood Ghani, his son-in-law left India on or about 10th June, 1946, for Penang. A power of attorney was executed in favour of Dawood Ghani and Hameed Sultan by the Indian heirs on 26th August, 1946. Actually, the management of the business at Penang was taken over by these power of attorney agents from the functioning executor, Amir Mohideen, on 18th December, 1946. Dawood Ghani returned to India on 25th June, 1947, and again left for Malaya in November, 1948. Hameed Sultan appears to have been staying on at Penang from 1946 onwards.
The Income-tax Officer, Nagapattinam, assessed the income of the estate of the deceased, Mohamed Rowther, in the hands of his heirs and legal representatives for the calendar years 1945, 1946, 1947 and 1948, the previous years relevant to the assessment being 1946-47, 1947-48, 1948-49 and 1949-50. His heirs, Indian as well as Malayan, were treated as an association of persons under the Indian Income-tax Act, and the entire income of the estate was brought to tax, treating the association as the unit of assessment. The contention raised on behalf of the Indian heirs that they were merely co-heirs of a deceased Mohammedan, that they did not constitute an association of persons, and that the assessment should be made as against each heir in respect of his or her share income was negatived by the Income-tax Officer. Their further plea that they should be treated as non-residents also did not find favour with the officer. The following tabular statement gives the particulars of the income, Indian and foreign, of the estate during the relevant assessment years :
Calendar year 1945
The assessees, the Indian heirs, preferred appeals to the Appellate Assistant Commissioner against the said assessments and reiterated their contention that they did not form a unit of assessment, and that it would be inappropriate to call them an association of persons and that the control and management of the affairs of the estate of the deceased, Mohamed Rowther, were wholly outside India, that they should be deemed to be non-resident under section 4A of the Act, and that the orders of assessment made by the Income-tax Officer were illegal and improper. The Appellate Assistant Commissioner in a brief unsatisfactory order, dismissed the appeals.
Appeals to the Income-tax Appellate Tribunal were taken by the assessee. The Tribunal reached the conclusion that there was an association of persons which could be the unit of assessment of the facts and circumstances set forth above, but that the association of persons must consist only of the Indian heirs, excluding the Malayan heirs. The Tribunal excluded the rental income from properties in India, acting under section 9(3) of the Act. What was brought to tax by the Tribunal was the income from the foreign business to the extent of 101/120 shares of the Indian heirs, excluding the shares of 19/120 of the Malayan heirs. The assessees plea that they were non-residents was, however, repelled.
At the instance of the assessee, the Tribunal referred the following question of law, which forms the subject-matter of T. C. No. 60 of 1958 :
'Whether the assessments of the eleven Indian heirs of Mohamed Rowther (deceased) as an association of persons on 101/120 parts of the Penang lighterage business of the four assessment years 1946-47 to 1949-50 are vali ?'
On a reference application made to this court under section 66(2) of the Act, the Tribunal was directed to submit a fresh statement of facts raising the following question, which forms the subject-matter of T. C. No. 6 of 1961 :
'Whether, on the facts and in the circumstances of the case, the assessments made on the assessee in the status of an association of persons, resident and ordinarily resident in the taxable territory are valid in la ?'
We have heard these reference cases together and they can be conveniently disposed of by a common judgment.
We shall first deal with the question of the status of the Indian heirs - whether they would constitute an association of persons assessable as a unit under the Indian Income-tax Act, or whether they are merely co-heirs of a deceased Mohammedan liable to be assessed, each in respect of his share income from the totality of the estate. Under the Mohammedan law, the death of an individual vests his estate in his heirs in definite and ascertained shares to be computed in accordance with personal law governing them (Hanafi law or Shia law). The co-heirs of a deceased Mohammedan are merely co-owners of a common estate, each with a specific, defined and ascertained shared. Of course, these heirs take the property subject to various charges being paid out, like debts, funeral expenses, etc. It is now settled law that mere co-ownership is not sufficient to justify an assessment by the department treating the co-owners as an association of persons (see Indira Balakrishna v. Commissioner of Income-tax). This co-ownership is not destroyed even if it so happens that the management of the joint undivided estate is entrusted to the care of a manager by a court or if the properties vest in custodia legis by reason of the appointment of the receiver (see S. C. Mazumdar v. Commissioner of Income-tax). But there is nothing impracticable or impossible for co-owners of for co-heirs to attract the characteristics of an association of persons under the Indian Income-tax Act if the facts and circumstances of the case so warrant. An association of persons is a unit of assessment under the Indian Income-tax Act. The precise meaning of the expression has come up for consideration on several occasions before the courts. The words 'association' indicates plainly the voluntary combination for a common endeavour and not a mere legal status resulting from operation of law. Co-owners, co-heirs or co-legatees do not constitute such association in respect of the income of the joint or common asset by reason only of their jural relationship. But, if they unite themselves with the objective of earning income, they constitute an association of persons for assessment purposes and they cannot take advantage of their legal position to resist assessment on that basis. The essential criterion that attracts the label of 'association of persons' in the income-tax department is the unity of the income-making purpose rather than the unity of title in the income-yielding asset.
This question has been discussed and dealt with elaborately by a Division Bench of this court in Estate of Mohd. Oomer Sahib v. Commissioner of Income-tax. In that case, a Mohammedan who was carrying on business of manufacture and sale of beedies died intestate on December 17, 1942, leaving as his heirs, N, a son by his predeceased wife, L, his widow, and his four children by L. The widow L, and D, a maternal uncle of N, carried on the business after the death of O. A suit for partition was instituted by N (represented by D as his next friend) and pending these proceedings on 17th March, 1943, two advocates were appointed as joint receivers of all the properties of O, on the basis of a compromise between all the heirs. The widow filed another suit for partition, and, in her application for the continuance of the joint receives which N opposed, the court ordered the continuance of the receivers on 25th May, 1943. The receivers continued in charge of the business till 25th November, 1946, when the business was put up for auction in the suit for partition and N bought the business. The Income-tax department proceeded under section 41(1) of the Act and assessed the profits of the business for the calendar years 1943 to 1946 in the hands of the joint receivers on the basis that the profit accrued to an association of persons consisting of the heirs. The Tribunal confirmed this assessment. This court held that joint receivers were receivers appointed by the court within the meaning of section 41(1), that neither the fact that the heirs of O inherited the business on his death and owned it thereafter as co-sharers with defined shares and the income belonged to the group of heirs with defined shares, nor the fact that they were entitled to and did receive their share of the profits, constituted them an association of persons, that the fact that the group of co-sharers did not constitute a firm or a partnership had no relevance to the question whether they constituted an association of persons, that as the business was continued without any interruption after the death of O and all the heirs all through wanted receivers to be appointed to conduct the business, there was a unity of purpose and objective between them which was sufficient to constitute them an association of persons, the ultimate object of which was that profits should be earned on their behalf.
We have no doubt that, in the instant case, the executors, Amir Mohideen, who alone of the three executors got into the management of the business at Penang, functioned only as a result of the common consent of all the heirs, both Indian and Malayan. We are, of course, not now concerned with the Malayan heirs, as they have been excluded from the association of persons by the Tribunal. So far as the Indian heirs are concerned, there is ample evidence to show - and indeed, there is a clear finding of fact on this point by the Tribunal - that Amir Mohideen carried on the business on behalf of the Indian heirs with their concurrence and cooperation. The remittance of $ 15,000 is September, 1945, from India to Penang is significant and is explicable only on the ground that the heirs in India agreed to the business being carried on by one or other of the executors at Penang. In the statement of the case, which is an agreed statement between the department and the assessee, it is observed by the Tribunal as follows :
'The Indian heirs obtained an overdraft accommodation from the Indian Overseas Bank Ltd. for $ 15,000 with which the executors revived the lighterage business on September 3, 1945, with the eighteen lighters available and continued to carry it on.'
There is clear indication in the recitals of the power of attorney dated August 26, 1946, executed by the Indian heirs in favour of Dawood Ghani that the business was under the management of executors with the consent of the Indian heirs. Clause 11 of that power reads :
'To take charge and possession of the estate from E. P. Mohamed Noorudeen and S. Amir Mohideen who are in charge of and in possession of the estate and management of the business at Penang on our behalf.'
It must be noted that the testator did not specifically authorise the executors to carry on the business after his death. The will is very brief in its terms and the appointment of executors and the bequests devised are in these terms :
'I appoint E. P. Mohamed Noorudeen, Amir Mohideen and T. V. Sheik Mohamed to be the executors and trustees of this my will.
I give, bequeath and devise all my estate and property whatsoever and wheresoever situate unto my trustees upon trust to distribute them among my said wives and their children by me according to Mohammedan law of the Hanafi sect.'
There is no evidence to show that the executors who obtained probate of the will before the Japanese court as well as before the British court obtained sanction of the court to run the lighterage business. On those materials the only conclusion that is possible is that the Indian heirs jointly permitted and desired the continuance of the business in the hands of the executors at Malaya, particularly because they were persons competent to run the business and because the heirs were all in India, none of them being in a position to go to Penang and take over the business. In our opinion, the Tribunal has taken the correct view that the Indian heirs formed themselves into an association of persons in running the business at Penang through the agency of the executors and that, therefore, they are liable to be treated as a unit of assessment. The question referred in T. C. No. 60 of 1958 is therefore answered against the assessee who will pay the costs of the department. Counsels fee Rs. 250.
The relevant statutory provision on the question whether the association is a resident or not is section 4A(b) which runs thus :
'For the purposes of this Act.....
(b) a Hindu undivided family, firm or other association of person is resident in the taxable territories unless the control and management of its affairs is situated wholly without the taxable territories ......'
In order to ascertain whether the control and management of the affairs of the association was inside or outside the taxable territories, regard must be had only the manner in which the Penang business was carried on and to the part played by the Indian heirs in respect of such management. The interpretation of the term 'control and management' occurring in section 4A(b) is found in the decision of the Supreme court in V. V. N. M. Subbayya Chettiar v. Commissioner of Income-tax. Fazl Ali J., delivering the judgment of the court quotes with approval the following observation of Patanjali Sastri J., as he then was :
'Control and management signifies in the present context, the controlling and directive power, the head and brain as it is sometimes called, and situated implies the functioning of such power at a particular place with some degree of permanence, while wholly seem to recognise the possibility of the seat of such power being divided between two distinct and separated places.'
At pages 172 Fazl Ali J. observes :
'....we take it that the word affairs must mean affairs which are relevant for the purpose of the Income-tax Act and which have some relation to income.'
Ordinarily, the income from a business arises only at the place where the business is carried on. If the owner of the business, however, resides elsewhere, that is, a place outside the business place, his tax liability for the purpose of income-tax would depend upon his place of residence. It is presumed that an owner of a business has the control and management of the business whether or not he is physically present on the spot where the business is carried on. But at the same time, it must be remembered that 'control and management' means de facto control and management, and not merely the right or power to control and manage. This has been laid down in B. R. Naik v. Commissioner of Income-tax, Commissioner of Income-tax v. Erin Estate and K. V. Narasimha Rao Bahadur v. Commissioner of Income-tax. In other words, an assessee -we mean a Hindu undivided family, firm or an association of individuals - can claim to be a non-resident only by adducing proof that nothing was done within the taxable territory in relation to the business outside the territory, which can be described as a necessary integral part of the business activity in furtherance of the business. The mere physical presence of the karta of the family, or a partner of the firm, or the members of the association of individuals in India is not sufficient to attribute to them the character of 'resident' as defined in section 4A of the Act. To quote the words of Viswanathan Sastri J. in Commissioner of Income-tax v. Erin Estate 'control and management therefore means de facto control and management. The existence of a mere right or power of control and management is not the criterion....It is not what the partners of the firm in the present case have power to do, but what they actually do that is of importance in determining the place where the control is exercised. When section 4A(b) refers to the control and management of its affairs by the firm, it means the affairs which have some relation to the business whose income, profits and gains are sought to be taxed....' It is not possible to lay down in precise or definite terms as to what activity would answer this description as everything depends upon the nature of the business and the degree of activity and the facts and circumstances of a particular case. It has been held that the mere receipt in India by the karta or a partner of copies of business books would not by itself amount to an exercise of control. (Commissioner of Income-tax v. Palaniappa Chettiar). The mere presence of the karta for some time in India has been held not to imply control of the foreign business during that period from India (Commissioner of Income-tax v. Gangabishan Mohanlal). These principles are not doubt fairly clear but their application is not always easy, as there are borderline cases in which it would be very difficult to appreciate to appreciate the precise nature of the so-called activity in India relating to a foreign business. But the onus is upon the assessee, who claims to be a non-resident, to prove that the entire control and management of the affairs of the association or Hindu undivided family or firm was wholly outside the taxable territories.
In the present case, its is plain and obvious that, for the calendar years 1945 and 1946, the association of persons, which was represented only by Amir Mohideen at Malaya, must be deemed to be a non-resident. Amir Mohideen was in charge of the business solely and exclusively, no doubt, for and on behalf of the Indian heirs. But, in so far as the conduct of the business was concerned, he was in full and complete charge of the business and was not under the directions of the Indian heirs. This position cannot be disputed in view of the terms of the release deed executed by Amir Mohideen in favour oh Dawood Ghani on 18th December, 1946, when the latter took over the management of the business from him. The document reads :
'In consideration of the 4,800 dollars, being the commission payable to the trustee, paid by the beneficiaries to the trustee (the receipt whereof the trustee hereby acknowledges) and the indemnity hereinafter contained, the trustee hereby agrees to hand over to the beneficiaries the management and control of the business and other effects belonging to the estate of the said Ana Mohamed Rowther.'
This clause is sufficiently clear to indicate that, till the business was handed over by Amir Mohideen, it was under his management and control with plenary powers to conduct it in the light of his own wisdom. Amir Mohideen was certainly a non-resident, he having resided at Penang during the relevant period. In our opinion, there is no justification for treating the association of persons as a resident for the two years 1945 and 1946 in respect of the foreign business income. In respect of the later years 1947 and 1948, the business was run by Dawood Ghani, he having taken over the management from Amir Mohideen and holding a power of attorney from the Indian heirs. It is common ground that Dawood Ghani is not a non-resident. Dawood Ghani admittedly came to India from Penang on 25th May, 1947, and remained here till November, 1948. He was therefore resident in Indian from 25th May, 1947, up to November, 1948. In the assessment order relating to the assessment year 1948-49, the Income-tax Officer has recorded the following concession made on behalf of the assessee : 'In the absence of materials to show that during this period he did not exercise any control or management of the foreign business or of the Indian affairs of the estate, the auditors expressed no objection to my treating the estate as resident and ordinarily resident.' In the assessment order of the Income-tax Officer relating to the year of assessment 1949-50 the following concession made on behalf of the assessee is recorded : 'During the accounting year therefore the (Dawood Ghani) remained in India from January 1, 1948, to November, 1948, for about 11 months. In the absence of materials to show that during this period he did not exercise any control or management of the foreign business or of the Indian affairs of the estate, the auditors expressed no objection to treating the estate as resident and ordinarily resident under section 4A(b) of the Act.'
It is impossible for the assessee to contend at this stage that in respect of the accounting years, calendar years 1947 and 1948, they must be deemed to be non-resident. We are of opinion that the concession on behalf of the assessee was rightly and properly made on the materials on record and that it is too late in the day for them to contend that they are non-residents. It follows that for the years 1947 and 1948 (assessment years 1948-49 and 1949-50) the association of persons cannot be treated as a non-resident but must be deemed to be a resident and an ordinarily resident as defined under the Act.
The question referred to us for decision in T. C. No. 6 of 1061 is therefore answered in favour of the assessee in respect of the calendar years 1945 and 1946 (assessment years 1946-47 and 1947-48) and against the assessee in respect of the calendar years 1947 and 1948 (assessment years 1948-49 and 1949-50). There will be no order as to costs in this reference.