The judgment of court was delivered by
RAJAGOPALAN, J. - When Khan Sahib Mohammed Oomer Sahib died intestate on December 17, 1942, his heirs succeeded to his house properties and to the business of manufacture and sale of beedies that he had carried on. The heirs were Noorullah, a son by his predeceased wife, Oomers widow, Luthfunnissa Begum, and his four children by her. The children were all minors when he died. Noorullah, represented by his maternal uncle. Dawood, as his next friend, applied to this court in Application No. 495 of 1943 for permission to institute a suit for partition in forma pauperis. During the pendency of these proceedings, on March, 17, 1943, two advocates of this court, Mr. Azizuddin and Mr. Karunakaran, were appointing joint receivers of all the properties of Oomer. That appointment was based on compromise on that point and at that stage between all the heirs of Oomer. Since the widow Luthfunnissa anticipated delay in the disposal of the application made by Noorullah to institute his suit for partition in forma pauperis she filed C.S. No. 132 of 1943 for partition. In that suit she preferred Application 1162 of 1943 for the continuance of the joint receivers. Why Noorullah opposed that application is not clear, but the fact remains that he did oppose it. Despite opposition, this court ordered the continuance of the receivers on May 25, 1943. Subsequent to that Sri Karunakaran was replaced by Sri K.K. Sridharan as one of the joint receivers.
There was never any dispute about the fractional share to which each of the six heirs of Oomer was entitled. In due course there was a preliminary decree for partition in C.S. No. 132 of 1943.
It should be noted that there was no break in the continuity of business after the death of Oomer. None of the parties desired at any time to break that continuity. First, Luthfunnissa and Dawood carried on the business. Next, it was carried on by the joint receivers appointed on March 17, 1943, and the joint receivers were continued by the order of the court dated May 25, 1943, on Application No. 1162 of 1943. The receivers continued in charge of the business till November 25, 1946, when, in the proceedings in the suit for partition, the business was put up for auction before the co-heirs and Noorullah bought the business.
The calendar year was the year of account for the business for the four assessment years 1944-45 to 1947-48, the relevant accounting years for which were 1943 to 1946. The profits of the business were assessed to tax in the hands of the joint receivers on the basis that the profits accrued to an association of persons, overruling the contention of the assessee, that the share of the profits of each of the co-heirs should be taxed separately. That view was upheld successively by the Appellate Assistant Commissioner and by the Tribunal. It was only the assessment to tax of the profits of the business that was in issue, as section 9(3) of the Act covered the assessment to tax of the income from the properties.
Under section 66(1) of the Act the Tribunal referred the following question to this court :
'Whether the income-tax assessment of the business of Spade Clover Beedies belonging to the estate of the deceased and carried on during the previous years 1943 to 1946 as an association of persons for the assessment years 1944-45 to 1947-48 is valid ?'
Before we deal with the contentions of the learned counsel before us it may be desirable to set out the relevant findings of the departmental authorities and the Tribunal.
All of them agreed that the further appointment of the joint receivers ordered by the court on Application No. 1162 of 1943 in C.S. No. 132 of 1943 was with the consent of the parties, and it was not, therefore, really an appointment of receivers by court within the meaning of section 41(1). They appear to have overlooked the fact, that in the proceedings in Application No. 1162 of 1943 one of the co-sharers, Noorullah, opposed the continuance of the receivers. That was one of the points specifically taken by the assessee even at the stage of assessment by the Income-tax Officer. That was put in issue again in the appeal to the Appellate Assistant Commissioner. We shall examine a little later the scope and effect of that opposition of Noorullah to the continuance of the receivers. It was, however, on the application of section 41(1) of the Act that the assessment was ultimately upheld by the Tribunal.
The Income-tax Officer recorded :
'The assessment will be made on the receivers as representing an association of persons consisting of Luthfunnissa Begum and the five children.'
After stating in paragraph 10 of his order 'I, therefore, hold that the provisions of section 41 are not at all applicable to this case' the Appellate Assistant Commissioner recorded in paragraph II of his order :
'Even assuming without admitting that section 41 is applicable, there would still be no change in the mode of assessment as the beneficiary is the entire body of heirs as a single unit and as it is no behalf of this unit or association of persons that income, profits and gains were received by the receivers.'
The Tribunal recorded in paragraph 7 of its appellate order :
'For purpose of these appeals, the assessments presently under appeal have to be considered as having been made involving section 41...... as the Department has apparently invoked the section and as the procedure has not been challenged in these appeals it does not appear to us to be necessary to discuss the propriety of the assessment on the joint receivers. The assessees in these appeals are essentially the various beneficiaries comprising of the parties of the first and second parts, who have also accepted this fundamental position by filing the present batch of, though overlapping, appeals.'
Which was the association of persons whose income or profits the departmental authorities purported to assess is the next question. We shall advert again to the relevant findings. The Income-tax Officer held that the widow and the five children of the deceased, Oomer, constituted an association of persons, which association the receivers represented. In paragraph 9 of his order the Appellate Assistant Commissioner recorded :
'I, therefore, hold that after the death of Mohammed Oomer, Luthfunnissa Begum and the five minor children were a body or association of persons joined together for the common purpose of earning income. They inherited the estate of the deceased jointly and were undoubtedly conducting the business as an association of persons. When the receivers were appointed on 24th March, 1943, they were mere representatives of the association and not of the heirs individually.'
In paragraph 15 the Appellate Assistant Commissioner summed up the position thus :
'I hold that the widow and the five minor children inherited jointly the estate of Khan Sahib Md. Oomer Sahib as an association of persons with definite shares under the Muhammadan law, that as such they carried on the business jointly till 24th March, 1943, that thereafter the business was conducted on their behalf as a single unit by two joint receivers, that the receivers were appointed by the High Court on the basis of a compromise arrived at by all the heirs... that even under section 41 it is the association of all the heirs which is the real beneficiary............'
The Tribunal held on alternative grounds that the basis of the assessment should be that the profits of the business that the joint receivers carried on accrued to an association of persons. In paragraph 10 of its appellate order the Tribunal recorded :
'The beneficiaries in this case are, no doubt, entitled to defined shares in the business as forming part of the intestate estate, but in the absence of an agreement among them bringing their mutual relationship into existence, they can only constitute an association of persons and not a partnership or a firm among themselves.'
The alternative basis was set out in paragraph 12 of its order : '.......... the business source has been assessed as one unit on the two receivers as an association of persons. Though the proper course........ will be to assess the joint receivers on behalf of all the beneficiaries as constituting an association of persons,....... even alternatively considering the receivers only as the contemplate assessees......... the two receivers have to be held as having jointly carried on the business in question.'
The Tribunal was thus of the view, that either the heirs of Oomer constituted an association of persons whom the receivers represented, on independently of that, the joint receivers themselves constituted an association of persons.
The relevant portion of section 41(1) runs :
'In the case of income, profits or gains chargeable under this Act which..... any receiver or manager...... appointed by or under any order of a court,......... are (is) entitled to receive on behalf of any person, the tax shall be levied upon and recoverable from such....... receiver or manager....... in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable, and all the provisions of this Act shall apply accordingly.'
The provisions to section 41(1) have no bearing on the questions at issue before us.
Section 41(2) provided :
'Nothing contained in sub-section (1) shall prevent either the direct assessment of the person on whose behalf income, profits or gains therein referred to are receivable, or the recovery from such person of the tax payable in respect of such income profits or gains.'
It was common ground that it was not under section 41(2) that the assessment was made.
The first question is, were the joint receivers 'receivers appointed by the court' within the meaning of section 41(1). We have pointed out that the assumption of the departmental authorities which apparently the Tribunal adopted, that the order dated May 25, 1943, was based on the consent of all the co-sharers, could not be strictly accurate, if the proceedings of this court in Application No. 1162 of 1943 were examined. Noorullah objected to the continuance of the receivers. The 'appointment,' which in effect was a case of continuance of the joint receivers, was ordered by the court. Therefore the joint receivers were receivers appointed by the court within the meaning of section 41(1).
It is not therefore necessary for us to consider whether in Jainulabdeen Sahib v. Commissioner of Income-tax, the learned judges of this court correctly interpreted the scope of the decision of the Privy Council in Keshardeo Chamria v. Commissioner of Income-tax. What was found in Keshardeo Chamria v. Commissioner of Income-tax was that factually there was no order of a court appointing any one as receiver. At page 401 of the report, after referring to the provisions of section 41(1), their Lordships observed :
'In their Lordships opinion the case does not come within the words of the section at all. The respondent and Ramprotap were never receivers or managers by or under any order of the court. The order of April 2, 1931, did not do so, nor did it purport to do so. It follows, therefore, that the section has no application to the case........'
In construing this passage, Leach, C.J., observed in Jainulabdeen Sahib v. Commissioner of Income-tax :
'Their Lordship there held that an order of the court appointing managers of an estate, the order being made in accordance with an agreement entered into between the parties, did not bring the case within the section.'
The liability imposed by section 41(1) on a receiver appointed by court is that the tax shall be levied upon and recoverable from such a receiver in the like manner and to the same amount as it would be leviable upon land recovered from the person or persons on whose behalf such income, profits or gains are receivable. In this case the profits of the business were received by the joint receivers, but such receipt were on behalf of the six co-sharers, heirs of the deceased, Oomer. The liability imposed by section 41(1) on the joint receivers was co-extensive with that of the co-sharers, no more and no less. If the co-sharers who owned the business conducted by the receivers in the relevant years constituted an association of persons section 41(1) would undoubtedly authorise assessment on the basis that the taxable income was that of an association of persons. That was specifically adverted to by the Income-tax Officer at the earliest stage. The departmental authorities, as we pointed out, were of the view, that the six co-sharers did constitute an association of persons; and that was also apparently the view of the Tribunal. Was that conclusion correct is the question.
We shall set out again the finding of the Tribunal :
'.......... in the absence of an agreement among them bringing their mutual relationship into existence, they can only constitute an association of persons and not a partnership or a firm among themselves.'
If all that the Tribunal meant was that in the absence of agreement there could be no firm or partnership, no exception could be taken. Obviously the Tribunal did not imply that absence of the agreement with nothing more was enough to constitute a group of persons an association of persons for the purpose of assessment to income-tax. If all that was established was that the assessable income belonged to a group of co-sharers with defined shares, with the earning of which income none of them had anything to do, that would not be enough to constitute them an association of persons. Nor could the fact, that group of co-sharers did not constitute a firm or partnership, have any real bearing on the question, did that constitute an association of persons. What then was it that made the co-sharers in this case 'an association of persons' within the meaning of section 3 of the Act ?
Whether the heirs of Oomer, as co-sharers of the business as one of his assets which they inherited, could be viewed as an association of persons during the period between December 17, 1942, and March 17, 1943, when the business was managed by Luthfunnissa and Dawood, did not arise for decision. Nor was any liability based on the determination of the question, whether the appointment of the receivers on March 17, 1943, with the consent of the co-sharers was enough to imply the existence of an association of persons on whose behalf and with whose consent the receivers were to conduct the business. The appointment of joint receivers on May 25, 1943, was despite the objections of Noorullah, one of the co-sharers. No attempt was made by the Department to mark off any of these periods from the others for purposes of assessment even with reference to the year of account, 1943. The basis of assessment was apparently that all through 1943 and, of course, thereafter the joint receivers appointed on May 25, 1943, received the income of the business on behalf of the co-sharers to whom it belonged. So the question, whether the co-sharers constituted an association of persons, was really determined in this case with reference to the appointment of joint receivers on May 25, 1943.
As has been repeatedly pointed out, the Act does not define what constitutes an association of persons, which under section 3 of the Act is an entity or a unit for assessment to income-tax. We shall not under take what eminent judges had declined to do, to evolve a formula of universal application. Whether a given group of persons to whom assessable income accrued constituted an association of persons will have to be decided primarily with reference to all the facts of that case. Our limited problem, therefore, is to decide whether the co-sharers who inherited the business of Oomer constituted an association of persons in relation to that business and in the relevant years of account.
In the absence of any statutory definition, the word 'association' has to be given its normal dictionary meaning. To 'associate' is to join in a common purpose of action. 'Association' does necessitate the exercise of volition of those who form the association, the exercise of that volition can be by or on behalf of those who form the association. It should be taken as well settled now that an association of persons can include minors.
In Buldana District Main Cloth Importers v. Commissioner of Income-tax; the learned judge observed :
'..... when two or more persons unite together of their own free volition in some common purpose or action they can be deemed to have associated together and formed an association.'
In Mohamad Abdul Kareem and Co. v. Commissioner of Income-tax Yahya Ali, J., stated :
'But the dictionary meaning of the word associate is to join in common purpose or to join in an action. Any combination of persons who have joined together in a profit making enterprise would, according to ordinary parlance, amount to an association.'
Earlier than this, in B.N. Elias and others, in re, Derbyshire, C.J., quoted as apposite the observations of Cotton, L.J., in Smith v. Anderson :
'I do not think it very material to consider how far the word association differs from company or partnership, but I think we may says that it 'association' is intended to denote something different from a company or partnership, it must be judged by its two companions between which it stands, and it must denote something where the associates are in the nature of partners. It seems to me (not that I think it material) that it might have been intended to hit the case which we have frequently seen, of a number of persons or a number of firms joining themselves together for the purpose of carrying on a particular adventure in order to make gain by it.'
To render an association of persons a taxable unit, for which section 3 provides, the object of the association must be to produce income, profits or gains.
In Commissioner of Income-tax v. Laxmidas Devidas Beaumont, C.J., observed at page 589 :
'In my opinion, the only limit to be imposed on the words other association of individuals is such as naturally follows from the fact that the words appear in an Act imposing a tax on income, profits and gains, so that the association must be one which produces income, profits or gains.'
These observations were approved of by this court in Mohamad Abdul Kareem and Co. v. Commissioner of Income-tax (see the observations at pages 427-28). The same idea was expressed in different words by Chagla, C.J., in Indra Balkrishna v. Commissioner of Income-tax at page 330 :
'In our opinion what is required before an association of persons can be liable to tax is not that they should receive income but that they should earn or help to earn income by reason of their association, and if the case of the Department stops short of mere receipt if income them the Department must fail in bringing home the liability to tax of individuals as an association of persons.'
Neither the fact that the heirs of Oomer inherited the business on his death the owned it thereafter as co-sharers with defined sharers, nor the fact that they were entitled to and did receive their shares of the profits, either each separately or both taken together constituted them an association of persons liable to be taxed on that basis. It is also true that the co-sharers themselves did not produce the income of the business. The business was conducted by the receivers. They were receivers appointed by the court within the meaning of section 41(1) of the Act when they were appointed on May 25, 1943. If, however, these receivers represented an association of persons, that is, if the co-sharers already constituted an association of persons before May 25, 1943, and that association remained unbroken, the fact that the receivers were appointed by court would not affect the existence or the continuity of that association of persons.
We pointed out earlier that the business was continued without any interruption after the death of Oomer. The nature of the business was such that unity of control was necessary. It could not be conducted in fractional shares. The parties all through desired to preserve and did preserve that unity of control. First Luthfunnissa and Dawood conducted the business. Between March 17, 1943, and May 25, 1943, the joint receivers appointed with the consent of all the co-sharers conducted the business. When the co-sharers wanted receivers to be appointed to conduct the business there was a unity of purpose and objective between them which should suffice to constitute them an association of persons, the ultimate object of which was that profits should be earned on their behalf. On May 25, 1943, there was a fresh order of the court, and the joint receivers who had been appointed on March 17, 1943, were continued in office to conduct the business. We pointed out earlier that Noorullah opposed the application preferred by Luthfunnissa for the continuance of the receivers. The opposition was apparently to the persons to be appointed receivers and not to the continuance of the business or to the unity of control that was necessary. Noorullah himself had realised that when he applied earlier for the appointment of receivers to conduct the business among other things. Despite Noorullahs opposition when Luthfunnissa asked for the continuance of receivers in her application No. 1162 of 1943, the existence of the desire of all the co-sharers including Noorullah for the continuance of the business with proper persons to take charge of the business under the orders of the court was clear. That intention was material on which the departmental authorities and the Tribunal which agreed with them could find that the co-sharers did constitute an 'association of persons.'
As we pointed out earlier, if the heirs of Oomer constituted an association of persons, the profits of the business which belonged to them could be assessed in the hands of the receivers under section 41(1) on the same basis. We have held that there was material on which the Tribunal could find that the co-sharers who owned the business constituted an association of persons. That should suffice to answer the question referred under section 66(1) of the Act against the assessee.
In view of what we have recorded above, it may not be necessary to discuss the question, whether the Tribunal was right in holding alternatively that the joint receivers themselves constituted an association of persons. If the assessment had been made on that basis, neither section 41(1) nor section 42(2) could have been invoked. In this case, however, the Tribunal itself was of the view, that the assessment had been made under the enabling provision, section 41(1).
In deciding what should be the basis of assessment under section 41(1) the question whether the joint receivers themselves constituted an association under section 41(1) the liability of the joint receivers was the same as that of the persons whom they represented. In this case the liability of the co-sharers was to be assessed as an association of persons, It was that liability that section 41(1) authorised the Department to impose on the joint receivers. The learned counsel for the Department contended that independent of section 41, the Department was entitled to tax the profits of the business in the hands of the joint receivers who had earned its profits, treating them as forming an association of persons. He relied on Hotz Trust v. Commissioner of Income-tax which dealt with trustees appointed under a will to carry on the business of hotel management. As a determination of that question is not strictly necessary for the disposal of this case, we express no opinion of ours.
We answer the question referred to us in the affirmative and against the assessee. The assessee will pay the costs of this reference. Counsels fee Rs. 250.
Reference answered in the affirmative.