Case Note & Summary
The appeals by certificate before the Supreme Court arose from a reference under Section 66(1) of the Indian Income-tax Act, 1922. The assessees were four grandsons of one Sinnamani Nadar, who had executed a settlement deed in their favour covering a house property, and later shares were purchased in the name of 'G. Murugesan & Brothers' by Nadar. The dividend income and house property income were credited to a common account called 'G. Murugesan & Brothers' in the books of Nadar's firm, and at the end of each year the balance was transferred in equal proportion to the individual accounts of the four assessees. For assessment years 1957-58 and 1958-59, the assessees filed their returns as an Association of Persons, but from 1959-60 onwards they claimed that they had divided their interests in the shares and should thereafter be assessed as individuals. The Income Tax Officer assessed them as an Association of Persons for all six assessment years, and the Appellate Assistant Commissioner confirmed that assessment. The Income Tax Appellate Tribunal, however, held that the assessees should be assessed as individuals. On a reference, the Madras High Court answered in favour of the Revenue, holding that the joint purchase of shares, the guardian-signed transfer applications, and the joint collection of dividends established that the assessees acted as an Association of Persons. Before the Supreme Court, the assessees contended that mere joint gift of shares, joint registration, and joint realisation of dividends did not prove functioning as an Association of Persons, while the Revenue argued that the proved facts clearly established such functioning. The Supreme Court examined the expression 'Association of Persons' under Section 3 of the 1922 Act and relied on the principles laid down in Commissioner of Income-tax, Bombay, North, Kutch and Saurashtra v. Indra Balkrishna, which required a voluntary combination of two or more persons for a common purpose of producing income. The Court observed that volition was an essential ingredient, and that in matters of receiving dividends from shares where no management was involved, joint ownership and joint receipt of dividends alone could not support an inference of Association of Persons. For the first two assessment years, the assessees' own returns as Association of Persons amounted to an admission that justified the Department's assessment as AOP. For the later years, the assessees had specifically stated that they were no longer functioning as an Association of Persons and had realised dividends in their individual capacity; this assertion remained unrebutted and was not inconsistent with the proved facts. The Court further held that members of an Association of Persons could withdraw at any time without observing any particular form. Consequently, the Supreme Court modified the High Court's answer: for assessment years 1957-58 and 1958-59, the assessees were rightly assessed as an Association of Persons; for assessment years 1959-60 to 1962-63, they were to be assessed as individuals. The appeals were partly allowed accordingly.
Headnote
A) Income Tax - Association of Persons - Definition and Essential Ingredients - Indian Income-tax Act, 1922, Section 3 - An Association of Persons requires two or more individuals to voluntarily combine together for a common purpose of producing income; volition on the part of the members is an essential ingredient. In the case of receiving dividends from shares where there is no question of any management, it is difficult to draw an inference that two or more shareholders functioned as an Association of Persons from the mere fact that they jointly own shares and jointly receive dividends. Held that the Department's inference of AOP status was not justified for years after members declared withdrawal. (Paras 7-9) B) Income Tax - Assessment Status - Admission in Returns - Indian Income-tax Act, 1922, Section 3 - For assessment years 1957-58 and 1958-59, the assessees themselves submitted their returns in the status of Association of Persons, which constituted an important piece of evidence. Held that the Department was justified in assessing them as an Association of Persons for those two years based on their own admission. (Paras 3-4) C) Income Tax - Association of Persons - Withdrawal and Volition - Indian Income-tax Act, 1922, Section 3 - Members of an Association of Persons may withdraw from it at any time; no one can be compelled to continue as a member and no particular form need be observed for withdrawal. If members assert that they have realised their dividends as individuals and this assertion remains unrebutted and is not inconsistent with proved facts, they must be assessed as individuals. Held that for assessment years 1959-60 to 1962-63, the assessees were to be assessed as individuals, not as an Association of Persons. (Paras 9-11)
Issue of Consideration
Whether the Department was justified in assessing the assessee in the status of an Association of Persons under the Indian Income-tax Act, 1922 for the assessment years 1957-58 to 1962-63 in respect of dividend income.
Final Decision
The Supreme Court partly allowed the appeals. For assessment years 1957-58 and 1958-59, the assessees were rightly assessed as an Association of Persons because of their own admission in the returns. For assessment years 1959-60 to 1962-63, the assessees were to be assessed as individuals, as they had specifically stated they were no longer functioning as an Association of Persons and had realised dividends individually; this claim was unrebutted and not inconsistent with proved facts. The High Court's answer was modified accordingly, and the matter of house property income, already decided in favour of the assessee and not appealed, was left untouched.
Law Points
- For forming an Association of Persons under Section 3 of the Indian Income-tax Act
- 1922
- members must voluntarily combine for the purpose of producing income
- volition is an essential ingredient. Mere joint ownership of shares and joint receipt of dividends
- without any act of management
- does not by itself establish an Association of Persons. Members of an Association of Persons may withdraw at any time and no particular form is required for withdrawal. A statement by members that they have started drawing dividends separately must be accepted in the absence of facts to the contrary. For years where assessees filed returns as Association of Persons
- their own admission is important evidence justifying assessment as Association of Persons.
