COMMISSIONER OF INCOME TAX vs. INDIRA BALKRISHNA

SUPREME COURT OF INDIA

S.K. Das, Kapur & Hidayatullah, JJ.

Civil Appeals Nos. 249 & 250 of 1958

14th April, 1960

(1960) 28 CCH 0116 ISCC

(1960) 39 ITR 0546

Legislation Referred to

Sections 2(31), 4(1), 26

Case pertains to

Asst. Year 1950-51, 1951-52

Decision in favour of:

Assessee

Liability in special cases—AOP—Co-widows of Hindu governed by Mitakshara law having not exercised their right of separate enjoyment of assets inherited and doing nothing which would help them to produce income, they cannot be assessed as AOP

Held :

An AOP must be one 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, however, necessary to add some words of caution here. There is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an AOP; it must depend on the particular facts and circumstances of each case as to whether the conclusion can be drawn or not. There is no finding that the three widows have combined in a joint enterprise to produce income. The only finding is that they have not exercised their right to separate enjoyment, and except for receiving the dividends and interest jointly, it has been found that they have done no act which has helped to produce income in respect of the shares and deposits. On these findings it cannot be held that the three widows had the status of an AOP within the meaning of s. 3 of the Indian IT Act.—CIT vs. Lakshmidas Devidas (1937) 5 ITR 584 (Bom) : TC44R.914, In re, Dwarakanath Harischandra Pitale (1937) 5 ITR 716 (Bom) : TC44R.915 and In re, B.N. Elias (1935) 3 ITR 408 (Cal) : TC44R.913 approved; Indira Balkrishna vs. CIT (1960) 39 ITR 546 (SC) : TC44R.916 affirmed.

(Paras 9 & 11)

Conclusion :

Co-widows of Hindu governed by Mitakshara law having not exercised their right of separate enjoyment of assets inherited and doing nothing which would help them to produce income, they cannot be assessed as AOP

Words & phrases—”Association of persons”—In s. 3 of 1922 Act—Means an association in which two or more persons join in a common purpose—CIT vs. Lakshmidas Devidas (1937) 5 ITR 548 (Lah) : TC37R.848 and In re Dwarkanath Harishchandra Pitale (1937) 5 ITR 716 (Bom) : TC44R.915 applied

Counsel appeared:

K.N. Rajagopal Sastri with D.Gupta, for the Revenue : N.A. Palkhivala with S.N. Andley & J.B. Dadachanji, for the Assessee

S.K. DAS, J.

These two appeals with special leave have been heard together. They arise out of similar facts and the question of law arising therefrom is the same.

2. The short facts are these. One Balkrishna Purshottam Purani died on 11th Nov., 1947. He left behind him three widows and two daughters. The three widows were named Indira, Ramluxmi and Prabhuluxmi. These widows as legal heirs inherited the estate of the deceased, which consisted of immovable properties situate in Ahmedabad, shares in joint stock companies, money lying in deposit, and share in a registered firm. For the two asst. yrs. 1950-51 and 1951-52 (the corresponding account years being the Samvat years 2005 and 2006) the ITO issued notices to the legal heirs of Balkrishna Purshottam Purani. Pursuant to those notices, returns were filed under the heading, “Legal heirs of Balkrishna Purshottam Purani”, in one case and in the name of the estate of Balkrishna in the other; the status was shown as “individual” in one case and “AOP” in the other. They were signed by Indira, one of the three widows. For the asst. yr. 1950-51 the total income was shown as under :

.	Rs.
Property	11,011
Share from registered firm	4,071
Dividends	51,796
Interest	22,343
Ground rent	125
Total	69,346

For the asst. yr. 1951-52, the total income was shown as

.	Rs.
Property	10,879
Share from registered firm	460
Dividends	80,426
Interest on deposits	536
Ground rent	125
Total	92,426

3. For both years the ITO took the status of the assessee as an “AOP” and on that footing made two assessment orders. There was an appeal to the AAC, and two of the points taken before him were (a) that the three widows ought to have been assessed separately and not as an “AOP”, and (b) that, in any event, the income from property ought to have been assessed separately in the hands of the three widows by reason of the provisions in s. 9(3) of the IT Act, 1922. The AAC rejected point (a) but accepted point (b). Then, there was a further appeal to the Tribunal, Bombay. The Tribunal held that the entire estate of deceased Balkrishna Purshottam Purani was inherited and possessed by the three widows as joint tenants and its income was liable to be assessed in their hands in the status of an AOP. The Tribunal further held that the AAC was wrong in holding that the shares of the three widows were definite and determinable and s. 9(3) was applicable. The assessee then moved the Tribunal to refer certain questions of law which arose out of its orders to the High Court of Bombay. The Tribunal referred four such questions, but we are now concerned with only one of them, viz., question No. 3, which was in the following terms :

“(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessment made on the three widows of Balkrishna Purshottam Purani in the status of an AOP is legal and valid in law ?”

4. Two references were made to the High Court in respect of the orders passed for two assessment years and they gave rise to IT Refs. Nos. 52 and 53 of 1955. The leading judgment was given in IT Refs. No. 52 of 1955. The High Court held that the Tribunal was in error in coming to the conclusion that the three widows could be assessed in the status of an AOP with regard to the income which they earned as heirs of their deceased husband. Therefore, it answered question No. 3 in the negative. The Department represented by the CIT, Bombay, then applied to this Court and obtained special leave to appeal from the judgment and orders of the High Court of Bombay in the two references. These two appeals have been filed in pursuance of the special leave granted by this Court. The appellant is the CIT, Bombay, and the assessee is the respondent.
5. The argument on behalf of the appellant is that the High Court was in error when it said that “what is required before an AOP 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 at mere receipt of income, then the Department must fail in bringing home the liability to tax of individuals as an AOP”. It is submitted that the High Court did not, in the statement quoted above, lay down the correct test for determining what is an “AOP” for the purposes of the IT Act.
6. Before we go on to discuss the argument presented on behalf of the appellant, it is necessary to clear the ground by stating what is the position of co-widows in Mitakshara succession and what are the findings arrived at by the Tribunal. The position of co-widows is well-settled. They succeed as co- heirs to the estate of their deceased husband and take as joint tenants with rights of survivorship and equal beneficial enjoyment; they are entitled as between themselves to an equal share of the income. Though they take as joint tenants, no one of them has a right to enforce an absolute partition of the estate against the others so as to destroy their right of survivorship. But they are entitled to obtain a partition of separate portions of the property so that each may enjoy her equal share of the income accruing therefrom. The Tribunal found that the widows in this case did not exercise their right to separate possession and enjoyment and “they chose to manage the property jointly, each acting for herself and the others and receiving the income of the property which they were entitled to enjoy in equal shares”. Learned counsel for the appellant has emphasized before us the aforesaid finding of the Tribunal and has contended that on the finding of joint management, the widows fulfilled even the test laid down by the High Court and constituted an “AOP” for taxing purposes. The High Court, however, rightly pointed our that the only property which the widows could have managed jointly was the immovable property which fetched an income of about Rs. 11,000, and as to that property, the AAC had held that s. 9(3) applied. There was no appeal by the Department against that finding and it was not open to the Tribunal to go behind it. Even on merits the Tribunal was wrong in thinking that the respective shares of the widows were not definite and ascertainable. They had an equal share in the income, viz., one- third each, and the provisions of s. 9(3) clearly applied in respect of the immovable property.
7. With regard to the shares, dividends, and interest on deposits there was no finding of any fact of joint management. Indeed, the main item consists of the dividends and it is difficult to understand what act of management the widows performed in respect thereof which produced or helped to produce income. On the contrary, the statement of the case shows that the assessee filed lists of shares, copies thereof are marked annexure C and form part of the case, which showed that the shares stood separately in the name of each one of the three widows and this was not denied by the Department.
8. We now come to the main question in this appeal. What constitutes an “AOP” within the meaning of the IT Act ? It has been repeatedly pointed out that the Act does not define what constitutes an AOP, which under s. 3 of the Act is an entity or unit of assessment. Previous to the year 1924, the words of s. 3 were “individual, company, firm and HUF”. By the Indian IT (Amendment) Act of 1924(XI of 1924) the words “individual, HUF, company, firm and other association of individuals” were substituted for the former words. By the IT Amendment Act of 1939 (VII of 1939) the section was again amended and it then said :

“Where any Act of the Central legislature enacts that income- tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of this Act in respect of the total income of the previous year of every individual, HUF, company and local authority, and of every firm and other AOP or the partners of the firm or members of the association individually.”

By the same Amending Act (VII of 1939) sub-s. (3) of s. 9 was also added.

9. Now, s. 3 imposes a tax “in respect of the total income…. of every individual, HUF, company and local authority, and of every firm and other AOP or the partners of the firm or members of the association individually.” In the absence of any definition as to what constitutes an AOP, we must construe the words in their plain ordinary meaning and we must also bear in mind that the words occur in a section which imposes a tax on the total income of each one of the units of assessment mentioned therein including an AOP. The meaning to be assigned to the words must take colour from the context in which they occur. A number of decisions have been cited at the bar bearing on the question, and our attention has been drawn to the controversy as to whether the words “association of individuals” which occurred previously in the section should be read ejusdem generis with the word immediately preceding, viz., firm, or with all the other groups of persons mentioned in the section. Into that controversy it is unnecessary to enter in the present case. Nor do we pause to consider the widely differing characteristics of the three other associations mentioned in the section, Viz., HUF, a company and a firm, and whether in view of the amendments made in 1939 the words in question can be read ejusdem generis with HUF or company.

It is enough for our purpose to refer to three decisions : In re B.N. Elias (1935) 3 ITR 408 (Cal) : TC44R.913; CIT vs. Laxmidas Devidas (1937) 5 ITR 584 (Bom) : TC44R.914 and In re, Dwarakanath Harischandra Pitale (1937) 5 ITR 716 (Bom) : TC44R.915. In In re, B. N. Elias (supra) Derbyshire, C.J., rightly pointed out that the word “associate” means, according to the Oxford Dictionary, “to join in common purpose, or to join in an action.” Therefore, an AOP must be one 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. This was the view expressed by Beaumont, C.J., in CIT vs. Lakshmidas Devidas (supra), at page 589 and also in In re, Dwarakanath Harischandra Pitale (supra). In In re, B. N. Elias (supra), Costello, J., put the test in more forceful language. He said : “It may well be that the intention of the legislature was to hit combinations of individuals who were engaged together in some joint enterprise but did not in law constitute partnerships….When we find,….that there is a combination of persons formed for the promotion of a joint enterprise…..then I think no difficulty arises whatever in the way of saying that…..these persons did constitute an association….”

We think that the aforesaid decisions correctly lay down the crucial test for determining what is an AOP within the meaning of s. 3 of the IT Act, and they have been accepted and followed in a number of later decisions of different High Courts to all of which it is unnecessary to call attention. It is, however, necessary to add some words of caution here. There is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an AOP within the meaning of s. 3; it must depend on the particular facts and circumstances of each case as to whether the conclusion can be drawn or not.

10. Learned counsel for the appellant has suggested that having regard to ss. 3 and 4 of the Indian IT Act, the real test is the existence of a common source of income in which two or more persons are interested as owner or otherwise and it is immaterial whether their shares are specific and definite or whether there is any scheme of management or not. He has submitted that if the persons so interested come to an arrangement, express or tacit, by which they divide the income at a point of time before it emanates from the source, then the association ceases; otherwise it continues to be an association. We have indicated above what is the crucial test in determining an AOP within the meanings of s. 3, and we are of the view that the tests suggested by learned counsel for the appellant are neither conclusive nor determinative of the question before us.
11. Coming back to the facts found by the Tribunal, there is no finding that the three widows have combined in a joint enterprise to produce income. The only finding is that they have not exercised their right to separate enjoyment, and except for receiving the dividends and interest jointly, it has been found that they have done no act which has helped to produce income in respect of the shares and deposits. On these findings it cannot be held that the three widows had the status of an AOP within the meaning of s. 3 of the Indian IT Act.
12. The High Court correctly answered question No. 3 in the negative. Accordingly, the appeals fail and are dismissed with costs. There will be one set of hearing fee in the two appeals.