N. v. Shanmugham and Co. v. Commissioner of Income-tax, Madras

Jlegde, J. These companion appeals by certificate under s. 66A ( 2) of the Indian Income Tax Act, 1922 (in short 'the Act') are directed against the decision of the Madras High Court in. a tax reference under s. 66 ( 1) of the Act, relating to the assessment y.~ars 1958-59 and 1959-60. Messrs. N. V. Shanmugam and Co., a firm, was carrying on G business in the manufacture and sale.of snuff under a deed of part· nership dated April 20, 1955. Its partners were S. P. Ramiah Nadar, Murugavel Nagar and Shanmughavel Nadar. S. P. Mohan; a minor had been admitted to the benefits of the partnership, . his share in the net profits being 1/6th. The deed of partnership pro­ vided that the partnership could not be dissolved before August 31, H 1955. But it was op.~n to the partners to continue the partner· ship or enter into a-fresh partnership on fresh terms and . condi­ tions. On September 17, 195 6, Ramiah Nadar filed a suit in the city Civil Court, Madras for the dissolution of the partnership L 12Sup .Cl/70 -8 . with effect from August 31, 1956 and for laking of accounts. He also applied for the appointment of a receiver to take charge of the business. On September 21,.1956, the Coµrt appointed three re­ ceivers two of whom were the partners of the firm namely Ramiah Nadar and Murugav!!l Nadar and the third was an Advocate by name Ram Mohan. The business of the firm had been stopped from September I, 1956 to September 21, 1956. The CClurt directed the receivers "to reoJJl:n and conduct the snuff business for the purpose of winding up, with powers to realise the outstandings and discharge the dues of the firm" subiect to the foliowing among . other terms. Clause 4 : The receivers can carry on the business of the partnership normally Clause 6 : All parties to have access to the books of th.' firm and to the business premises .. Claure 7 : All parties are entitled to get informa- 8 tion relating to the conduct of the business from the re- . D ceivers. Clause 8 : The profits if any earned from 1-9-.1956 will be treated as an asset of tbe firm subject to be divid­ ed between the parties in the manner set out in para­ . graph 10 of tit: deed dated 20-4-1955. The receiver or receivers shall not be entitled to any share in the pro­ fits for the management.· Clause 9 : The receivers will pay every month Rs. 1,5001-to plaintiff, Rs. 1,500/- to the !st defendant, Rs. 750/- to 2nd defendant and Rs. 750/- to 3rd de­ fedant by his guardian from November I, 1956 (owners of the dissolved firm) . Sometime later the court appointed a Commissioner for taking the accounts of the firm and for arranging the sale of the business as a going concern; but no sale took place. In the assessment year 1958-59, th~ business yielded a profit of Rs. 93,739/-. In the assessment ytlllr, 1959-60, there was a profit of Rs. 1,54,393/-. In response. to a notice from the Income-tax Officer, the receivers filed :"Qi!" returns but showed the profits earned in the busine's in Section D of the r.:tum. But they asserted that the income should be assessed in the hands of the beneficiaries as they are already assessees having other sources of income. The Income-tax Officer rejected that contention. He caqre..tc the conclusion that the busi­ . ness was carried on bv an '!lssoCiation of JJl:rsons' and as such no question of. a~essing the individual partners on their share of in· come at the rateapplicabli:: to them waufd arfse, a:s wntended by JI ~HANMUGHAM v. C.I.T. (Hegde, }.) 343 A the receivers. The Appellate Assistant Commissioner rejected tHe appeal of the assessees and confirmed the order of the Income­ tax Officer; but on a further appea~ the Tribunal came to the con­ clusion that the profits earned should be as~essed to tax in the hands of the individual partners at the rates applicable to them. At the instance of the Commissioner of Income-tax, Madras, the B Tribunal submitted the following question under s. 66 ( 1) of -the· Act for the opinion of the High Court : "Whether the income of the business in snuff could be. assessed on the receivers as an aSsC>ciation of persons under s. 10 or under s. 41 of the Act." The High Court answered that Question in favour of the: Revenue. The real point.in controversy between the Revenue and the· assessees is whether the profits earned in th.e business should 1?C considered as profits earned by an "assoeiation of persons" or whether it should be considered as havil)g been earned by. indi­ viduals. The receivers appointed by the court were merely the representatives of the real owners of the business i.e. the erstwhile· partn;rs of the firm. The primary liability to pay the tax due was· that of the real owners. The tax may be levied and recovered from the Receivers under s. 41 ( 1) of the Act. To borrow the expres­ sion from the Income-tax Act, 1961, they are only representative assessees. The fact that there were three receivers did not make them an assodation of receivers. The three receivers jointly re­ presented the real owners. The circumstance that there were three· receivers was wholly irrelevant for the purpose of the assessment. There was no auestion of assessing.the receivers as an "association of persons". The real question"fs whether the 1>'rsons whom the receivers represl'nte~eoti~tituted an "association of . persons". Further in~· of bu~ines~ profits, all assf\"sment of tax is done· un~~;:-3' read withs. 10 of the Act. Section 3 impO!es the~har~e · ·and s. 10 to the extent relevant for our pre•ent purpose provides that 'tax shall be payable by the assessee und,er the head "Profits and gains of busine<>s" in resoect of the profits or gains of business carried on by him subiect to the allowances allowed under sub-s. (2) of that section. Section 41 empowers the Revenue to levv· the tax that could hav.~ been levied on the person who earned the profits on one or the other of h.is reore•entatives mentioned in th~t section and recover the ·same from that reore•entative "in the like manner and to the same amount as it would be leviable uoon and recoverable'' from the oersnn on whm.~ behalf •uch nrofit• art) recoverable and all the provisions of the Act shall apply accord-· inelv. Section 41 of the Act doe~ not imonse anv senarate ch•ree. It onlv emnowers the Revenue to levy anc\ C"llect a taJC clnP. from a person or persons, from his or their repr~'!ntative. He!l~e there . is no question of either tbe receivers being an "association of persons" or their being liable "under ·s. 10 or s. 41 of the Act". The.liability of the receivers arose under s. 41 read withs, 10. The Tribunal wanted the opinion of the High Court.on the question whether the profits in question should be considered to have been earned by an "association of persons" or by individuals. We shall proceed to answer tha,t question. Mr. M. C. ChagJa, learned Cciunlil.ll for the assessee contended that the liability of receivers is co-extensive with that of the bene­ ficiarie> and cannot in any case. be a larger or wider liability. If the assessment is made on a receiver whatever the nature of the profit, whatever the mode of compuation, his liability to pay tax must be determined in accordance with s.41 of the Act; that section is mandatory; the tax payable by him on the profits earired. can only be ascertained in accordance with the special previsions laid down in that section; it is not open to the department to ignore the provisions of s.41 and levy tax on receivers in the same way as en ·asses<ee who does not fulfil the character of a receiwr. According to the Counsel when an assessment is made under s.41 of the Act, it must be done und.:r one of the heads mentioned in Chap. III of the Act and the provisiom laid down with reg·ard to computaticn of the income-tax must be carried out; Section .,i1 will come into play after the income has been so computed. In support of this contention, he relied on th.: decision of the Bom­ bay High Court in Commissioner of Income-tax, Ahmedabad v. Balwantrai lethalalVaidya and ors.,(') which decision has been appmved by this Court in C. R. Nagappa v. Commissioner of In­ .come Tax.(") Proceeding further the Counsel urged that the asse>sment of the receivers should have been on the same basis as the erstwhile partners of the firm would have been assessed in respect of the profits in question. According to him, the business in question could not have been conducted by the erstwhile part­ ners as an "association of persons". He urged that the erstwhile partners of the firm were fighting amongst the!llselves; some of them wanted to carry on the business while one of them wanted· to close down the same. Hence they could not have carried on the business as an "association of persons". He urged that an "association of persons" as used in s.3 of the Act means · an association in which two or more persons voluntarily join in a "common purpose" or "common action". He further urged that in . a business said to be carried on by an "association of persons", there must be unity of control and unity of management; as no such unity existed amongst the erstw_!lile partners 9,f the firm, it cannot be said that the receiv.:rrtepresented an "association of persons". (I) 34. LT.R. 187. (2) 73, J.T.R., 626. SHANMUGHAM v. C.I.T. (Hegde,J.) 345 We are unable to accede to the contentions of the learned Counsel for tht; assessee. It is not denied that the ousiness was carried on by the receivers on behalf of erstwhile partners of the firm and that considerable profits were earned from the business. The control and the management of the business was in the hand~ of the receivers. That control .and management was a unified one. The receivers had joined in a common purpose-and they act!d jointly. When they did so they acted on behalf 'Of the persons who were the owners of the business. The receivers did not and could not have repr~sented the individual interest of the various owners' of the business. If they had done so there would have been chaos in the business. The profits to which those owners lay daim and which. they were not averse to pocket, were earned on behalf of. an ''ass0ciation of persons". The profits were earned on behalf of the persons who had a common interest created by the order of the eourt and were on that account of an "association of persons". The existence of specific or defined interest in the profits did not make the earning any the less by an 'association of persons'. Liability to taJC. depends upon the earning of profits by a unit and not upon the ultimate division of the profits. The ex­ pression "association of persons" is not defined in the Act. At one stage, there was conflict of judicial opinion about the true mean­ ing of that expression. That conflict can now be said to have been settled by some of the decisions of this Court to which we shall refer presently In Commissioner of income-tax, Bombay v. lndira Bal· krishna ( 1 ) this Court accepted the observations . of Sir Harold Derbyshire C.J. in ln re B. N. Elias and ors.('). that the word, "associate" means "to join in common purpose or to join in an action". Therefore "association of persons" as used in s. 3 of the Act means an association in which two or more persons join in a common purpose or common action, and as the words occur in a section which impo~es a tax· on income, the asscciation must be one, the obj.~ct of which is to produce income, profits or gains. It is true that in the instant case before the receivers were appointed, one of the erstwhile partners objected to the continuance of the partnership. But there is nothing in the record to show that he objected to the continuance of the busiress. AlLthe same we shall assume that he did not want at that stage that the business should_ be continued. But in fact business was continued in pursuance of the orders of the court. All the owners of the business including the person who objected to the· continuance of tr..~ business were . given, month by month, some amounts from the proceeds of the business. It was not said that any of them declined to receive the same. That means all of them acquiesced in the continuance of (I) 39, l.T.R. 546. (2) 3, J.T.R. 40-'. ' - ~ ,:_~ l. I the business. Each on.~ of the assessees wants to share the profits A earned en behalf of all of them but when it comes to the question of paying tax, they want to deny that the business was ~onducted on behalf of all of them. It is true considerations of equity are irrelevant in interpreting taxing provisions but while considering the que;tion who carried on a business, the course of conduct of the concerned parties is relevant. On the facts proved, it must B h held that in law the erstwhile partners of the firm carried on the bu0 i.ness through their representatives. In Mohamad Ncoru/lah v. C.I.T. Madras(') this Court had to consider whether the assessment in that case was rightly made on an "association of persons". Therein, 0, a Mohamaden who was carrying on the business of manufacture and sale of beedies of a particular brand, died intestate on Decombe! 17, 1942 leav- ing as his heirs, N, a son by his predeceased wife, L his widow and his four children by L. The widow L and one D carried on the business after the death of O.N, through his next friend, applied for leave to sue for partition in forma pauperis and pending these D p:oceedings on March 17, 1943, two advocates were appointed as joint receivers of all the properties of 0, by consent of all the parties. The consent on behalf of the minor was given by his . next friend. The widow L filed another suit for partition on May 10, 1943 but applied for the continuance of the joint receivers. N opposed the application on the ground that he wanted different pe;so111 to be appointed as receivers., By an order dated May 25, 1943. the Court ordered the continuance of the joint receivers. The receivers continued in charge of the business till November, 1946 when the business was put up for sale by auction and was purchased by N. The Income-tax Officer assessed the profits of the busir.~ss for the calendar years 1943-46 in the hands of the receivers as the income of an "association of persons" consisting of the heirs of 0. The Appellate.Assistant Commissioner as well as the Tribunal upheld the finding of the Income-tax Officer. On a reference under s.66 (1) of the Act, the High Court agreed with the view taken by the authorities under the Act. This Court upheld the view taken by the High Court. This decision was tried to be distinguished by Mr. Chagla on the ground that in that case all the parties had consented to the appointment of the receivers. None of the heirs of the deceased owner of the bminess wanted to break the unity of the business or its continuity and the business was of such a nature that it could not be carried on with- out consensus; therefore, the continuance of the business by the receivers was rightly considered as continuance of business by the heirs of the deceased. According to the Counsel such was not position in the present case. For the reasons already stated, we (I) 42. LT.R. 115. 18 SHANMUGHAM v. C.I.T. (Hegde, I.) 347 see no merit in that contention. We have earlier come to the conclusion that the business was continued with consent of all the owners. Hence for the purpose of this case it is not necessary to go into the question as to what would have been the position if the business had been continued without the copsent of ·an the owners. ·The facts of this case directly fall within the rule laid down by this Court in Commissioner of Income-Tax, Poona v. Buldana Distt. Main Cloth Importers Group('). The facts cf that case were : In 1945, the Deputy Commissioner of Buldana evolved a scheme for the distribution of cloth in his district and, with the sanction of the C.P. Government appointed a group of four persons as sole agents for the import of cloth from mills in various places in India and for its distribution to retailers. Fct diff~rent___periods · the group which. imported cloth was differently constitufea: H. & Co., which was a common member maintained the books relating to the business. Every time there was a change in the constituents of'the group, a separate set of books was main­ tained and the profits from those enterprises were divided between · the various persons who formed the group at the material time. The Appellate Tribunal found that the import and distribution of cloth was done on a joint basis, the purchasers were joint, so were the sales and the profits were ascertained on a joint basis and then distribuied according to the capital contributed by each member of the group. This Court held that the group was an "association of persons" and could be assessed on its profits as such to income-tax and excess profits tax. It further held that it made no difference that the business was carried on because the Deputy Commissioner of the district had appointed the members consituting the group to import and distribute the cloth. Therein the members of the group did not voluntarily join the group. They were put together hy the Deputy Commissioner and asked to act together, which they did. Similar is the position in the present case. For the reasons mentioned above, our answer to the question referred is that the profits in question were earned from a business carried on by an "association of persons". In the result these )lppeals fail and 'they are dismissed with costs. One hearing fee. ·G. C. Appeals dismissed. '(1) 42 I.T.R. 172.