Case: G. Murugesan and Brothers Vs. Commissioner of Income Tax, Madras

Beaumont, C. J., in Commr. of Income-tax v. Lakshmidas Devidas, at page 589 (1937) 5 ITR 584 (Bom.) and also in In re: Dwarkanath Harishchandra Pitale, 5 ITR 716 = (AIR 1938 Bom. 353 ) In re B. N. Elias, (1935) 3 ITR 408 (Cal.) 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 decision correctly lays down the crucial test for determining what is an Association of 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 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 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."8. 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 widows 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 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. Those circumstances do not by themselves go to show that they acted as an Association of Persons.9. But unfortunately for the assessees 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 neither 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 functioned as an 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 needed to 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 assessees assertion that they have realised their dividends in their individual capacity remains unrebutted. There is nothing to disprove that claim. None of the facts proved can be said to be inconsistent with the claim made by them.10. 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 S. C. Cambatta v. Commr. of Income-tax, Bombay (14 ITR 748) = (AIR 1947 Bom. 264 ). Therein, the only question was whether when an action is taken by an Income-tax Officer under Section 23-A, should the dividend deemed to have been declared to the shareholders must be considered to have 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 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 Mr. Karkhanis that the decision of this Court in N. V. Shanmugham Co. v Commr. of Income Tax, Madras, (81 ITR 310) = (AIR 1970 SC 1707 ) lends any support for the contention of the Revenue. On the other hand, therein this Court relied upon the decision of this Court in (39 ITR 546) = (AIR 1960 SC 1172 ).

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]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 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. Those circumstances do not by themselves go to show that they acted as an Association of Persons.9. But unfortunately for the assessees 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 neither 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 functioned as an 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 needed to 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 assessees assertion that they have realised their dividends in their individual capacity remains unrebutted. There is nothing to disprove that claim. None of the facts proved can be said to be inconsistent with the claim made by them.10. 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.