Appeal Nos
685 to 690 of 1970
Appeals by certificate from the judgment and order dated 27th June 1968 by the Madras High Court at Madras in Tax case  No
308 of 1964
M C Setalvad and T A Ramachandran for the appellant
N D Karkhanis section P Nayar and R N Sachthey for the respondents
The Judgment of the Court was delivered by HEGDE J
These are connected appeals by certificate
They are directed against the decision of the High Court of Madras in a Reference under Section 661 of the Indian Income Tax Act 1922 to be hereinafter referred to as the Act
The question of law referred for ascertaining the opinion of the High Court was  Whether on the facts and in the circumstances of the case the Department was justified in assessing the assessee in the status of an Association of Persons  In this case we are concerned with the assessment of the assessee for the assessment years 1957 1958 to 1962 63
In all these years the assessees were assessed as an Association of the persons 
The contention of the assessees is that in the years in question they should have been assessed as individuals  and not as an Association of Persons 
Therefore the only question that calls for decision is as to the status of the assessee during the relevant assessment years
For deciding the question formulated above it is necessary to divide the assessment years into two groups
For the assessment years 1957 58 and 1958 59 the assessees themselves submitted their return in the status of Association of Persons  but for the later years they submitted their returns as individuals 
In their returns for the assessment years 1959 60 they stated that they have divided their interest in the shares and therefore they should be thereafter assessed as individuals 
It is necessary to mention one other circumstance before we proceed to set out the relevant facts
The income in which we are concerned in this case arises under two heads
Part of the income arises from house property 517 and the remaining income arises from dividends from shares
So far as the income from house property is concerned the High
Court has answered the question in favour of the assessee the Revenue has not appealed against that decision
Hence we need not go into that aspect
All that we have to decide in the present case is whether the dividend income which is the subject matter cf these appeals should be assessed in the hands of the appellants
as an Association of Persons  or as individuals 
Now we shall refer to the material facts as could be gathered  from the case stated by that Tribunal
One Sinnamani Nadarwho will be hereinafter referred to as Nadar  and his son Ganesan partitioned their family properties on December 4 1940
Thereafter Nadar started a firm of his own on June 27 1955
Later Nadar executed a settlement deed in favour of his four grandsons namely G Murugesan G Kathiresan G Raja Shankar and G Vettrivel
The property covered by the said settlement deed included a house property which had been let cut
Under this settlement deed the donees are to enjoy during the life time the properties gifted and thereafter the same was to devolve on their children
Sometime thereafter Nadar purchased a number of shares in Joint Stock Companies in the
name of G Murugesan  Brothers 
For each of such purchase a debit entry was made in the books of the firm
The share applications addressed to
the companies for the transfer of the shares from the prior owners to the name of G Murugesan and Brothers were signed by Padamavathy Ammal the mother of donees as their guardian
The donees were minors at the time most of these transactions took place
Murugesan be came a major on March 3 1955
After 1959 Murugesan himself signed all transfer applications both on his behalf as well as on behalf of his brothers
The youngest of the brothers became a major on 15th December 1962
The income from the house property and the dividend income from shares were credited to an account called G Murugesan  Brothers in the books of Nadar s Firm
In those books
there are separate account for G Murugesan  G Kathiresan G Raja Shankar and G Vetrivel
Private income and expenses of these persons were credited or debited to these individual accounts
At the end of each year the balance in the account of G Murugesan  Brothers is transferred in equal proportion to the individual accounts of the four persons mentioned above
There was a partition between Ganesan and his sons on 3rd February 1958 but that does not include the house property or the shares gifted by Nadar to his grandsons
As mentioned earlier for the assessment years 1957 58 and 1958 59 the assessees submitted their returns in the status of Association of Persons  and thereafter they submitted their returns as individuals
518 On the basis of the above facts the Income Tax Officer assessed the assessee during all the years mentioned earlier in the status of Association of Persons 
His orders were confirmed by the Appellate Assistant Commissioner
But on a further appeal to the Appellate Tribunal the Tribunal held that the assessee should be assessed as individuals  and not as Association of Persons 
At the instance of the Commissioner the question set out earlier was referred to the High Court
The High Court answered that question in the affirmative and in favour of the Revenue
The High Court was of the opinion that because of the fact that the shares were purchased jointly in the name of G Murugesan  Brothers the transfer applications were filed by Padmayathy acting as guardian of all the assessees and further after Murugesan became  major he collected the dividends jointly on behalf of the assessees  the assessees should be considered to have acted as an Association of Persons  That conclusion is challenged before us by Mr Setalvad appearing on behalf of the assessees
Counsel urges that the facts that a joint gift of shares was made in favour of more than one persons or those shares were regis tered jointly in their names or even the fact that the dividend was realised together do not go to show that the shareholders or the beneficiaries did act as an Association of Persons 
On the other hand it is contended on behalf of the Revenue by Mr Karkhanis that the facts proved in this case clearly establish that the assessee functioned as an Association of Persons 
The expression Association of Persons  is not a term of article That expression has come up for consideration before this Court in more than one case
In Commissioner of Income tax Bombay North Kutch and Saurashtra vs Indra Balkrishna  this Court after referring to the various judgments observed thus  It is enough for our purpose to refer to three decisions  In re
B section Elias  Commissioner of Income tax vs Laxmidas Devidas  and In re Dwark anath Harishchandra Pitale In re B N Elias Derbyshire CJ 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 association of persons 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 CJ in Com missioner of income tax vs Lakshmidas Devidas at page 589 1937 5 ITR and also In re Dwarkanath Harishchandra
519 Pitale
In re  B N Elias 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 same 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 decision correctly lay down the crucial test for determing what is an Association persons within the meaning of section 3 of the Income tax 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 intention
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 association of persons within the meaning of section 3 it must depend on the particular facts and circumstances of each case as to whether the conclusion can be drawn or not
 In the course of that judgment this Court also observed With regard to the shares dividends and interest on deposits there was no finding of any act of joint management
Indeed the main item consists of the dividends and it is difficult to understand what act of management the windows performed in respect thereof which produced or helped to produce income
 For forming an Association of Persons  the members of the association must join together for the purpose of producing an income
An Association of Persons  can be formed only when two or more individuals voluntarily combine together for a certain purpose
Hence volition on the part of the member of the association is an essential ingredient
It is true that even a minor can join an Association of Persons  if his lawful guardian gives his consent
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 more shareholders functioned as an Association of Persons  from the mere fact that they jointly own one or more shares and jointly receive the dividends declared
Those circumstances do not by themselves go to show that they acted as an Association of Persons 
But unfortunately for the assessee for the assessment years 1957 58 and 1958 59 they themselves had submitted their returns in the status of Association of Persons 
Those returns were 520 niether withdrawn nor did they file fresh returns as individuals
It was for the first time in the appeal it was argued on their behalf that they should not have been assessed as Association of Persons  The question whether the assessees function as on Association of Persons  during those years was best known to them
Their admission in that regard is an important piece of evidence
They have made no attempt to show that the said admission was made under erroneous impression of law or is otherwise vitiated
Hence for those years they were rightly assessed as an Association of Persons 
But so far as the other assessment years are concerned the same result does not follow
They themselves have specifically stated that they are no more functioning as Association of PerSons 
In the case of association of persons  it is always open to its members to withdraw from the same
No one can be compelled to continue as a member of an association
For withdrawing from an association there is no particular form need be observed
As seen earlier herein we are concerned only with the realisation of dividends
If the individual members of the association choose to realise their dividends as individuals there is an end of the association
The assessee s assertion that they have realised their dividends in their individual capacity remains un rebutted
There is nothing to disprove that claim
None of the facts proved can be said to be inconsistent with the claim made by them
For the reasons mentioned above we are unable to agree with the High Court that during the assessment years 1959 60 to 1962 63 the assessees should be held as having functioned as an association of persons 
Mr Karkhanis in support of the contention of Revenue relied on the decision of the Bombay High Court in section C Gambatta vs Commissioner of Income tax Bombay Therein the only question was whether when an action is taken by an Income tax Officer under Section 23A should the dividend deemed to have been declared to the shareholders must be considered has been taken by a husband and wife who were the joint holders of a share as an Association of Persons  or by the husband alone who under the Articles of Association was to act on behalf of the joint holders
The contention of the Revenue was that the husband alone was the shareholder
On the other hand the contention of the assessee was that they were an Association of Persons  and that contention was accepted by the 521 Court
The ratio of that decision has no bearing on the point in issue in the present case
We are also not able to agree with Mt Karkhanis that the decision of this Court in N V Shanmugham  Co vs Commissioner of Income Tax Madras lends any support for the contention of the Revenue
On the other hand therein this Court relied upon the decision of this Court in Commissioner of Income tax Bombay North Kutch  Saurashtra vs Indra Balkrishna In the result Civil Appeals Nos 685  686 of 1970 are dis missed with no order as to costs
Civil Appeals Nos
687 690 of 1970 are allowed with costs one hearing fee
Consequently the answer given by the High Court in those four appeals is discharged and in its place we answer the question in the negative and in favour of the assessee


Summary:
For the years 1957 58 to 1962 63 the assessees were assesed by the Income tax Officer as an Association of Persons  They had filed their returns for the first two of these years as Association of persons but in 1959 60 they claimed that they had divided their interest in the shares held by them and therefore in respect of them they should be thereafter assessed as Individuals 
The Appellate Assistant Commissioner upheld the order of the Income  tax Officer
The Tribunal however held that the assesseess should be assessed as Individuals  and not as Association of Persons 
The High Court in reference answered in favour of the Revenue
In appeal by certificate it was urged on behalf of the assessees appellants that the facts that a joint gift of shares was made in favour of more than one person or those shares were registered jointly in their names or even the fact that the dividend was realised together did not go to show that the shareholders or the beneficiaries did act as an Association of Persons  HELD  i For forming an Association of Persons  the members of the association must join together for the purpose of producing income
An Association of Persons  can be formed only when two or more individuals voluntarily combine together for a certain purpose
Hence volition on the part of the members of the association is an essential ingredient
519F G 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 one or more shares and jointly receive the dividends declared
These circumstances do not by themselves go to show that they acted as an Association of Persons 
519G H iiFor the years 1957 58 and 1958 59 the assessees were rightly assessed as an Association of Persons  because of their own admission which was an import ant piece of evidence
519H 520A B iiiFor the years 1959 60 and 1962 63 they had specifically stated that they were no more functioning as an Association of Persons 
In the case of an Association of Persons 
It is always open to its members to withdraw from the same
No one can be compelled to continue as a member of an association
For withdrawing from an association no particular form need be observed
520C D In the present ease the question related only to realisation of dividends
If the individual members of the association choose to realise their dividends as individuals there is an end of the association
The assesees  assertion that they bad realised their dividends in their individual capacity remained unrebutted
There was nothing to disprove their claim
None of 516 the facts proved could be said to be inconsistent with the claim made by them
520D E The answer therefore in respect of the years 1959 60 to 1962 63 must be in favour of the assessees
521C D