Case: N.V. Shanmugham &amp; Company Vs. Commissioner of Income Tax, Madras

1. These companion appeals by certificate under Section 66A (2) of the Indian Income Tax Act, 1922 (in short the Act) are directed against the decision of the Madras High Court in a tax reference under Section 66 (1) of the Act, relating to the assessment years 1958-59 and 1959-602. Messrs. N. V. Shanmugam and Co., a firm, was carrying on business in the manufacture and sale of snuff under a deed of partnership dated April 20, 1955. Its partners were S. L. Ramiah Nadar, Murugavel Nadar and Shanmughavel Nadar. S. P. Mohan, a minor had been admitted to the benefits of the partnership, his share in the net profits being 1/6th. The deed of partnership provided that the partnership could not be dissolved before August 31, 1955. But it was open to the partners to continue the partnership or enter into a fresh partnership on fresh terms and conditions. On September 17, 1956, Ramiah Nadar filed a suit in the city Civil Court, Madras for the dissolution of the partnership with effect from August 31, 1956 and for taking of accounts. He also applied for the appointment of a receiver to take charge of the business. On September 21, 1956, the Court appointed three receivers two of whom were the partners of the firm namely Ramiah Nadar and Murugavel Nadar and the third was an Advocate by name Ram Mohan. The business of the firm had been stopped from September 1, 1956 to September 21, 1956. The Court directed the receivers "to reopen and conduct the snuff business for the purpose of winding up, with powers to realise the outstandings and discharge the dues of the firm" subject to the following among other termsClause 4 : The receivers can carry on the business of the partnership normallyClause 6 : All parties to have access to the books of the firm and to the business premisesClause 7 : All parties are entitled to get information relating to the conduct of the business from the receiversClause 8 : The profits if any earned from 1-9-1956 will be treated as an asset of the firm subject to be divided between the parties in the manner set out in paragraph 10 of the deed dated 20-4-1955. The receiver or receivers shall not be entitled to any share in the profits for the managementClause 9 : The receivers will pay every month Rs. 1,500/- to plaintiff, Rs. 1,500/- to the 1st defendant, Rs. 750/- to 2nd defendant, Rupees 750/- to 3rd defendant by his guardian from November 1, 1956 (owner of the dissolved firm)3. Sometimes later the Court appointed a Commissioner for taking the accounts of the firm and for arranging the sale of the business as a going concern; but no sale took place. In the assessment year 1958-59, the business yielded a profit of Rs. 93,739/-. In the assessment year 1959-60, there was a profit of Rs. 1,54,393/-. In response to a notice from the Income-tax Officer, the receivers filed "nil" returns but showed the profits earned in the business in Section D of the return. But they asserted that the income should be assessed in the hands of the beneficiaries as they are already assessees having other sources of income. The Income-tax Officer rejected that contention. He came to the conclusion that the business was carried on by an association of persons and as such no question of assessing the individual partners on their share of income at the rate applicable to them would arise, as contended by the receivers. The Appellate Assistant Commissioner rejected the appeal of the assessees and confirmed the order of the Income-tax Officer; but on a further appeal, the Tribunal came to the conclusion that the profits earned should be assessed to tax in the hands of the individual partners at the rates applicable to them. At the instance of the Commissioner of Income-tax, Madras, the Tribunal submitted the following question under Section 66(1) of the Act for the opinion of the High Court"Whether the income of the business in snuff could be assessed on the receivers as an association of persons under Section 10 or under Section 41 of the Act."4. The High Court answered that question in favour of the Revenue5. The real point in controversy between the Revenue and the assessees is whether the profits earned in the business should be considered as profits earned by an "association of persons" or whether it should be considered as having been earned by individuals.The receivers appointed by the court were merely the representatives of the real owners of the business i.e. the erstwhile partners of the firm. The primary liability to pay the tax due was that of the real owners. The tax may be levied and recovered from the Receivers under Section 41 (1) of the Act. To borrow the expression fromthe Income-tax Act, 1961, they are only representative assessees. The fact that there were three receivers did not make them an association of receivers. The three receivers jointly represented the real owners. The circumstance that there were three receivers was wholly irrelevant for the purpose of the assessment. There was no question of assessing the receivers as an "association of persons". The real question is whether the persons whom the receivers represented constituted an "association of persons". Further in respect of business profits, all assessment of tax is done under S. 3 read with S. 10 of the Act. Section 3 imposes the charge and section 10 to the extent relevant for our present purpose provides that tax shall be payable by the assessee under the head "Profits and gains of business" in respect of the profits or gains of business carried on by him subject to the allowances allowed under sub-section (2) of that section. Section 41 empowers the Revenue to levy the tax that could have been levied on the person who earned the profits on one or the other of his representatives mentioned in that section and recover the same from that representative "in the like manner and to the same amount as it would be leviable upon and recoverable" from the person on whose behalf such profits are recoverable and all the provisions of the Act shall apply accordingly. Section 41 of the Act does not impose any separate charge. It only empowers the Revenue to levy and collect a tax due from a person or persons, from his or their representative. Hence there is no question of either the receivers being an "association of persons" or their being liable "under Section 10 or Section 41 of the Act". The liability of the receivers arose under Section 41 read with Section 10. The Tribunal wanted the opinion of the High Court on the question whether the profits in question should be considered to have been earned by an "association of persons" or by individuals. We shall proceed to answer that question.

Court's reasoning:
7. We are unable to accede to the contentions of the learned Counsel for the assessee.It is not denied that the business was carried on by the receivers on behalf of erstwhile partners of the firm and that considerable profits were earned from the business. The control and the management of the business was in the hands of the receivers. That control and management was a unified one. The receivers had joined in a common purpose and they acted jointly. When they did so they acted on behalf of the persons who were the owners of the business. The receivers did not and could not have represented the individual interest of the various owners of the business. If they had done so there would have been chaos in the business. The profits to which those owners lay claim and which they were not averse to pocket, were earned on behalf of an "association of persons". The profits were earned on behalf of the persons who had a common interest created by the order of the Court and were on that account of an "association of persons". The existence of specific or defined interest in the profits did not make the earning any the less by an "association of persons". Liability to tax depends upon the earning of profits by a unit and not upon the ultimate division of the profits. The expression "association of persons" is not defined in the Act.At one stage, there was conflict of judicial opinion about the true meaning of that expression. That conflict can now be said to have been settled by some of the decisions of this Court to which we shall refer presentlyFor the reasons already stated, we see no merit in the contention. We have earlier come to the conclusion that the business was continued with consent of all the owners. Hence for the purpose of this case it is not necessary to go into the question as to what would have been the position if the business had been continued without the consent of all the owners. The facts of this case directly fall within the rule laid down by this Court in Commr. of Income-Tax, Poona v. Buldana Dist. Main Cloth Importers Group (1961) 42 ITR 172  = (AIR 1961 SC 1261 ). The facts of that case were : In 1945, the Deputy Commissioner of Buldana evolved a scheme for the distribution of cloth in his district and, with the sanction of the C. P. Government appointed a group of four persons as sole agents for the import of cloth from mills in various places in India and for its distribution to retailers. For different periods the group which imported cloth was differently constituted. H. and Co., which was a common member maintained the books relating to the business. Every time there was a change in the constituents of the group, a separate set of books was maintained and the profits from those enterprises were divided between the various persons who formed the group at the material time. The Appellate Tribunal found that the import and distribution of cloth was done on a joint basis, the purchasers were joint, so were the sales and the profits were ascertained on a joint basis and then distributed according to the capital contributed by each member of the group. This Court held that the group was an "association of persons" and could be assessed on its profits as such to income-tax and excess profits tax. It further held that it made no difference that the business was carried on because the Deputy Commissioner of the district had appointed the members constituting the group to import and distribute the cloth. Therein the members of the group did not voluntarily join the group. They were put together by the Deputy Commissioner and asked to act together which they did. Similar is the position in the present caseThe facts of this case directly fall within the rule laid down by this Court in Commr. of, Poona v. Buldana Dist. Main Cloth Importers Group (1961) 42 ITR 172  = (AIR 1961 SC 1261 ). The facts of that case were : In 1945, the Deputy Commissioner of Buldana evolved a scheme for the distribution of cloth in his district and, with the sanction of the C. P. Government appointed a group of four persons as sole agents for the import of cloth from mills in various places in India and for its distribution to retailers. For different periods the group which imported cloth was differently constituted. H. and Co., which was a common member maintained the books relating to the business. Every time there was a change in the constituents of the group, a separate set of books was maintained and the profits from those enterprises were divided between the various persons who formed the group at the material time. The Appellate Tribunal found that the import and distribution of cloth was done on a joint basis, the purchasers were joint, so were the sales and the profits were ascertained on a joint basis and then distributed according to the capital contributed by each member of the group. This Court held that the group was an "association of persons" and could be assessed on its profits as such tox and excess profits tax. It further held that it made no difference that the business was carried on because the Deputy Commissioner of the district had appointed the members constituting the group to import and distribute the cloth. Therein the members of the group did not voluntarily join the group. They were put together by the Deputy Commissioner and asked to act together which they did. Similar is the position in the present