Full Judgment Text
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PETITIONER:
N. V. SHANMUGHAM AND CO.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, MADRAS
DATE OF JUDGMENT:
23/04/1970
BENCH:
HEGDE, K.S.
BENCH:
HEGDE, K.S.
SHAH, J.C.
GROVER, A.N.
CITATION:
1970 AIR 1707 1971 SCR (1) 340
1970 SCC (2) 139
CITATOR INFO :
R 1973 SC2369 (10)
R 1977 SC2103 (15)
ACT:
Income-tax Act, 1922, s. 41(1)-Receivers appointed by Court
to ,carry on business of dissolved firm-Erstwhile partners
acquiescing in carrying on of business by receivers and
receiving from them their shares of the profits earned-
Assessment of income of business whether to be on erstwhile
partners as in individuals or as constituting an association
of individuals-Receivers whether an association of persons
Nature of liability of receivers under s. 41(1).
HEADNOTE:
The appellant was a partnership firm constituted under a
deed April ’20, 1955. On a suit for dissolution being filed
by one of the partners and an application being made for the
appointment of a receiver, the Court appointed three
’receivers two of whom were the erstwhile partners of the
firm and the third an advocate. The Court-ordered the
receivers to continue the business for the purpose of
winding up with the power to realise the out standings and
discharge the dues of the firm. The profits were to be
divided among the parties according to terms of the
partnership deed dated April 20, 1955. The business yielded
profits in the assessment years 1958-59 and’1959-60. In
response to notices issued to the Income-tax Officer the
receivers filed returns for these years showing ’nit’
income. They showed the profits in section D of the return.
They claimed that the income should be assessed in the hands
of the beneficiaries as they were already assessees having
other sources of income. The Income-tax officer rejected
the contention and held that the business was carried on by
an ’association of persons’ and, as such no question of
assessing the individual partners on their share of income
at the rates applicable to them would arise. The Appellate
Assistant Commissioner confirmed the order ,of the Income-
tax Officer. The Tribunal took the opposite view but the
High Court in reference answered the question referred to
it, namely whether the income "could be assessed on the
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receivers as a association ,.of persons under s. 10 or under
s. 41 of the Act", in favour of the revenue. In appeals to
this Court by certificate,
HELD : (i) The fact that there were three receivers was
wholly irrelevant for the purpose of assessment and did not
make them an association of receivers. In respect of
business profits, all assessments of tax is done under s. 3
read with s. 10 of the Act. Section 3 imposes the charge
and s. 10 provides for determining the profits and gains of
business. Section 41 does not impose any separate charge
but only empower the Revenue to levy and collect tax due
from a person or persons, from his or their representative.
The primary liability to pay the tax in the present case was
that of the real owners of the business i.e. the erstwhile
partners of the firm. There was thus no question of
assessing the receivers as an association of persons. The
receivers were not liable "under s. 10 or s. 41 ,of the
Act"; their liability arose under s. 41 read with s. 10.
[343 E-H; 344 A-B]
(ii) The control and management of the receivers was a
unified one. The receivers had joined in a common purpose
and they acted 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 represented the
individual interest of the various owners of the business;
that
341
would have resulted in chaos. The profits Were earned on
behalf of the persons who had a common interest created by
the order of the court and were on that account an
"association of persons". [345 B-C]
The fact that one of the erstwhile partners bad objected to
the continuance of the partnership could not lead to a
contrary conclusion. All the owners of the business
including the person who objected to the continuance of the
business were given month by month some amounts from the
proceeds of the business and none of them had declined to
receive the same. They were therefore an "association of
persons" within the meaning of s. 3 of the Act having joined
together for the purpose of producing income, profits or
gains. [345 G-H; 347 F]
Commissioner of Income-tax, Ahmedabad, v. Balwantrai
Jethalal Vaidya Qrs. 34 I.T.R. 187, C.R. Nagappa v.
Commissioner of Income-tax 73 I.T.R. 626, In re B. N. Elias
JUDGMENT:
42 I.T.R. 115, referred to.
Commissioner of Income-tax, Bombay v. Indira Balkrishna 39
I.T.R. 546 and Commissioner of Income-tax, Poona v. Buldana
Distt. Main Cloth Importers Group, 42 I.T.R. 172, applied.
&
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 294 and
295 of 1967.
Appeal from the judgment and order dated November 30, 1965
of the Madras High Court in Tax Case No. 215 of 1962
(Reference No. 120 of 1962).
M. C. Chagla, K. Srinivasan and T. A. Ramachandran, for
the appell it (in both the appeals).
B. Sen, G. C. Sharma and B. D. Sharma, for the respondent
(in both the appeals).
The Judgment of the Court was delivered by
Hegde, J. These companion appeals by certificate under s.
66A(2) of the Indian Income Tax Act, 1922 (in short ’the
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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 years 1958-59 and 1959-60.
Messrs. N. V. Shanmugam and Co., a firm, was carrying on
business in the manufacture and sale of snuff under a deed
of partnership 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 provided that the partnership could not
be dissolved before August 3 1, 1955. But it was open to
the partners to continue the partnership or enter into a
fresh partnership on fresh terms and conditions. On
September 17, 1956, Ramiah Nadar filed a suit in the city
Civil Court, Madras for the dissolution of the partnership
2Sup. Cl/70 8
342
with effect from August 31, 1956 and for taking of accounts.
He also applied for the appointment of a receiver to take
charge of the business. On September 21, 1956, the Court
appointed three receivers two of whom were the partners of
the firm namely Ramiah Nadar and Murugavel Nadar and the
third was an Advocate by name Ram Mohan. The business of
the firm had been stopped from September 1, 1956 to
September 21, 1956. The Court directed the receivers "to
reopen and conduct the snuff business for the purpose of
winding up, with powers to realise the outstandings and
discharge the dues of the firm" subject to the following
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 the firm and to the business
premises.
Clause 7 : All parties are entitled to get
information relating to the conduct of the
business from the receivers.
Clause 8 : The profits if any earned from 1-9-
1956 will be treated as an asset of the firm
subject to be divided between the parties in
the manner set out in paragraph 10 of the 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. 1,5001- to the
1st defendant, Rs. 750/- to 2nd defendant and
Rs. 750/- to 3rd defedant by his guardian from
November 1, 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, the business yielded a profit of
Rs. 93,739/-. in the assessment year, 1959-60, there was a
profit of Rs. 1,54,393/In response to a notice from the
Income-tax Officer, the receivers filed "nil" returns but
showed the profits earned in the businezs in Section D of
the return. 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 came to the
conclusion that the business was carried on by an
’association of persons’ and as such no question of
assessing the individual partners on their share of income
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at tile rate applicable to them would arise, as contended by
343
the receivers. The Appellate Assistant Commissioner
rejected the appeal of the assessees and confirmed the order
of the Incometax Officer; but on a further appeal, the
Tribunal came to the conclusion that the profits earned
should be assessed 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 Tribunal
submitted the following question under s. 66(1) of the Act
for the opinion of the High- Court :
"Whether the incomes of the business in snuff
could be assessed on the receivers as an
association of peisons 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 the business
should be considered as profits earned by an "association of
persons’," or whether it should be considered as having been
earned by individuals. The receivers appointed by the court
were merely the representatives of the real owners of the
business i.e. the erstwhile partners 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
expression from the Income-tax Act, 1961, they are only
representative assessees. The fact that there were three
receivers did not makethere an association of receivers.
The three receivers jointly represented the real owners.
The circumstance that there were three receivers was wholly
irrelevant for the purpose of the assessment. There was no
question of assessing the receivers as an "association of
persons". The real question is whether the Persons whom the
receivers represented constituted an "association of
persons". Further in respect of business profits,-,all
assessment of tax is done under s. 3 read with s. 10 of the
Act. Section 3 imposes the charge and s. 10 to the extent
relevant for our present purpose provides that tax shall be
payable by the assessee under the head "Profits and gains of
business" in respect of the profits or gains of business
carried on by him subject to the allowances allowed under
sub-s. (2) of that section. Section 41 empowers the Revenue
to levy the tax that could-have been levied on the person
who earned the profits on one or the other of his
representatives mentioned in that section and recover the
same from that representative "in the like manner and to the
same amount as it would be leviable upon and recoverable"
from the person on whose, behalf such profits are.
recoverable and all the provisions of the Act shall apply
accordingly. Section 41 of the Act does not impose any
separate charge. It only empowers the Revenue to levy and
collect a tax due from a person or persons, from his or
their representative. Hence there-.
344
is no question of either the 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 with S. 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
that question.
Mr. M. C. Chagla, learned Counsel for the assessee contended
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that the liability of receivers is co-extensive with that of
the beneficiaries 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 earned can only be
ascertained in accordance with the special provisions 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 on assessee who does not fulfil the
character of a receiver. According to the Counsel when an
assessment is made under s.41 of the Act, it must be done
under one of the heads mentioned in Chap. III of the Act
and the provisions laid down with regard to computation of
the income-tax must be carried out; Section 41. will come
into play after the incomes has been so computed. In
support of this contention, he relied on the decision of the
Bombay High Court in Commissioner of Income-tax, Ahmedabad
v. Balwantrai Jethalal Vaidya and ors.(1) which decision has
been approved by this Court in C. R. Nagappa v. Commissioner
of Income Tax. ( 2 ) Proceeding further the Counsel urged
that the assessment 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 partners as an "association
of persons". He urged that the erstwhile partners of the
firm were fighting amongst themselves; 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 41 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 erstwhile
partners of the firm, it cannot be said that the receivers
represented an "association of persons".
(1) 34, I.T.R. 187.
(2) 73, I.T.R., 626.
345
We are unable to accede to the contentions of the learned
Counsel for the assessee. It is not denied that the
business 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 hands of, the
receivers. That control and management was a unified one.
The receivers had joined in a common purpose and they actd
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 represented 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 claim and which they were
not averse to pocket, were earned on behalf of an
"association of persons". The profits were earned on behalf
of the persons who had a common interest creatd by the order
of the Court 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 tax depends upon the
earning of profits by a unit and not upon the ultimate
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division of the profits. The expression "association of
persons" is not defined in the Act. At one stage, there was
conflict of judicial opinion about the true meaning 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. Indira Bal
krishna(1) this Court accepted the observations of Sir
Harold Derbyshire C.J. in In re B. N. Elias and ors. (2).
that the words " 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 imposes a
tax on income, the association must be one, the object 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
business. All the 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 the 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
(1) 39, I.T.R. 546.
(2) 3, I.T.R. 408.
346
the business. Each one of the assessees wants to share the
profits earned on behalf of all of them but when it comes to
the question of paying tax, they want to deny that the
business was conducted on behalf of all of them. It is true
considerations of equity are irrelevant in interpreting
taxing provisions but while considering the question who
carried on a business, the course of conduct of the
concerned parties is relevant. On the facts proved, it
must’ be held that in law the erstwhile partners of the firm
carried on the business through their representatives.
In Mohamad Noorullah v. C.I.T. Madras(1) 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
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 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
proceedings 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 h.-. wanted different persons
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 business for the
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calendar years 1943-46 in the, hands of the receivers as the
income of an "association of persons" consisting of the
heirs of O. 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 business 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 without 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
(1) 42, I.T.R. 115.
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 it the business had been continued
without the consent of all 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(1). The facts of 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. For different periods the group which imported
cloth was differently constituted. 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 maintained 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 distributed
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 constituting the group to import and distribute the
cloth. Therein the members of the group did not voluntarily
join the group. They were put together by 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 appeals fail and they are dismissed with
costs. One hearing fee.
G. C. Appeals dismissed.
(1) 42 I.T.R. 172.
348
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