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

1. These are connected appeals by certificate. They are directed against the decision of the High Court of Madras in a Reference under Section 66 (1) of the Indian Income-tax Act, 1922 (to be hereinafter referred to as thethis case we are concerned with the assessment of the assessees 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.Now, we shall refer to the material facts as could be gathered from the case stated by that Tribunal. One Sinnamani Nadar (who 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 Shanker and G. Vettrivel. The property covered by the said settlement deed included a house property, which had been let out. Under this settlement deed, the donees are to enjoy during the lifetime 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 and 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 Padmavathy Ammal, the mother of donees as their guardian. The donees were minors at the time most of these transactions took place. Murugesan became 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 15-12-1962. The income from the house property and the dividend income from shares were credited to an account called "G. Murugesan and Brothers" in the books of Nadars Firm. In those books, there are separate accounts for G. Murugesan, G. Kathiresan, G. Raja Shankar and G. Vetrivel. Private income and expenses of these persons were credited or debited to those individual accounts. At the end of each year the balance in the account of G. Murugesan and 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 3-2-1958, 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.5. 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.6. The High Court was of the opinion that because of the facts that the shares were purchased jointly in the name of G. Murugesan and Brothers, the transfer applications were filed by Padmavathy 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.

Reasoning:
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.