Case: M. M. Ipoh &amp; Ors Vs. Commissioner Of Income-Tax, Madras

1. Meyyappa (I), Alagammal his wife, and Chokalingam and Meyyappa (II) his two minor sons formed in 1940 a Hindu undivided family which traded in the name of "M. S. M. M.". The family carried on extensive business in, rubber plantations, and in real estates in the Federated States of Malaya, Burma and India2. The property of the family was divided between the three male members on February 22, 1940. To Meyyappa (I) were allotted at the partition "business of the family" at Rangoon and at Karaikudi in the Ramnath District and three rubber estates in the Federated States of Malaya and some houses. Even after the partition Meyyappa (I) continued to remain in management on behalf of himself and his two minor sons of all the properties and the businesses carried on by the family when it was joint, and the businesses were carried on in the name of "M. S. M. M."3. The houses and the three rubber estates allotted exclusively to Meyyappa (I) were entered in the books of accounts opened in the name of "M. M. Ipoh" from the date of the division. In December 1941 Alagammal gave birth to a son who was named Chettiappa. Meyyappa (I) and Chettiappa then constituted a Hindu coparcenary which owned the property and the business as allotted to Meyyappa (I) in the partition of 1940. On December 30, 1949 a deed of partition was executed between Meyyappa (I) and Chockalingam (who had by then attained the age of majority), in respect of the businesses carried on in the name of "M S. M. M." The businesses were thereafter carried on in partnership between Meyyappa (I) representing himself and the minor Chettiappa and Chockalingam Meyyappa (II) was admitted to the benefits of that partnership. On April 13, 1950 partition was effected between Meyyappa (I) and the minor Chettiappa by posting entries in the books of account of M. M. Ipoh. It was agreed that the properties entered in the books of account of M. M. Ipoh shall be held by Meyyappa (I) and Chettiappa in two equal shares, and that the properties shall continue to remain in the management ofm M. S. M. M. to the benefit of which Chettiappa was admitted. A deed of partition recording the terms of that partition was executed on May 28, 1953 by Meyyappa (I) and Alagammal acting as guardian of the minor Chettiappa4. In 1951 Meyyappa (I) acceded to a demand made by Chockalingam on behalf of the M. S. M. M firm for a half share in the "M. M. Ipoh properties". There was however no division of the properties by metes and bounds, and the management of those properties as a single unit continued to remain with the M. S. M. M. firm as before5. Meyyappa (I) was assessed under the Indianx Act 1922 to tax year after year till the assessment year4 in respect of the income from the "M. M. Ipoh properties" as a resident individual or as a Karta of a Hindu undivided family. Later thex Officer, Karaikudi, Ramnath District, issued notices under S. 34 (1) of thex Act for the assessment years2 to4 and under S. 22 (2) for the years5 to7 for assessment of the income of "an association of persons styled M. M. Ipoh". Thex Officer rejected the contentions raised by Meyyappa (I) that there was no association of persons of the nature described in the notices and brought to tax the income of the "M. M. Ipoh Properties" as income received by an association of persons formed by Meyyappa (I) and Chettiappa in, and by Meyyappa (I), the M. S. M. M. firm and Chettiappa in the years6. In appeals filed by M. M. Ipoh, the Appellate Assistant Commissioner confirmed the orders passed by thex Officer subject to the modification that the income from the houses be assessed under S. 9 (3) of thex Act in the hands of the members individually, and not as the collective income of the association of persons. The Appellate Tribunal confirmed the order of the Appellate Assistant Commissioner7. The Tribunal drew up a statement of case and submitted under S. 66 (1) of the Indianx Act, the following question for determination of the High Court of Madras :"Whether the assessments on the Association of persons for assessment years2 to7 are valid ?",and declined to submit a statement of the case on five other questions, the first out of which alone is material in these appeals and need be set out :"Whether on the facts and in the circumstances of the case, there are any materials to hold the assessee as the Principal officer of M. M. Ipoh assessed in the status of an association of persons ?"At the hearing of the reference on the principal question, the High Court on the application of the assessee proceeded to deal apparently without any objection from the Commissioner with the additional question which had not been referred by the Tribunal8. The High Court held that the income brought to tax in the assessment year2 did not accrue to an association of persons, but the income in the years 195253 to7 accrued to an association of persons formed by Meyyappa (I), M. S. M. M. firm and the minor Chettiappa. The High Court was of the view that Meyyappa (I) acted on behalf of Chettiappa in forming the association, that the affairs of this association were under the management of Meyyappa (I) during the account years relevant to the assessment years3 to, that the association of persons was engaged in a joint enterprise for the purpose of producing income, that there being "unity of purpose and objectivity" the ultimate object of the association to earn income on behalf of the members of the association was "fully established". The High Court also held that by the notices for assessment of the income for the years3 to5 Meyyappa (I) did in fact have notice of the intention of thex Officer to treat him as the principal officer of the association, and the proceedings for assessment and reassessment were properly commenced. The High Court accordingly by order dated April 3, 1961 answered the first question in favour of the assessee in respect of the assessment year2 and against the assessee for the subsequent five assessment years. The High Court recorded in answer to the second question that thex Officer was justified in holding Meyyappa (I) to be the principal officer of "M. M. Ipoh "9. On November 21, 1961 five petitions were moved in the High Court of Madras under Art. 226 of the Constitution for a writ of prohibition restraining thex Officer from enforcing the demands made by him in respect of the tax assessed against "the association of persons M. M. Ipoh". In support of the petitions it was urged that S. 3 of the Indianx Act invested thex Officer with arbitrary and unguided power to assess to tax the income of an association of persons in the hands either of the association or of the persons constituting that association, and on that account S. 3 offended Art. 14 of the Constitution, and was to that extent void. The High Court rejected the petitions. Against the orders passed by the High Court in the petitions for writs, Meyyappa (I) has appealed. Against the orders recorded by the High Court in references under S. 66 the association of persons "M. M. Ipoh" has appealed

Court's reasoning:
12. But here no question of application of a more drastic procedure, or deprivation of valuable rights of appeal and revision, by the adoption of one of two alternative procedures arises. The procedure for assessment is the same whether the income is assessed in the hands of the association or the share of each member of the association is assessed separately14. Section 3 of thex Act does not, it is true, expressly lay down any policy for the guidance of thex Officer in selecting the association or the members individually as entities in bringing to tax the income earned by the associationThe nature of the authority exercised by thex Officer in a proceeding to assess to tax income, and his duty to prevent evasion or escapement of liability to pay tax legitimately due to the State, constitute, in our judgment, adequate enunciation of principles and policy for the guidance of the17. This resume of the legislative provisions discloses that the relevant provisions were made with a view to ensure against evasion of tax, while ensuring that the same income shall not be charged more than once18. The policy and the purpose of the Act may be gathered from "other operative provisions applicable to analogous or comparable situations": Jyoti Pershads case, (1962) 2 SCR 125     at p. 139: (AIR 1961 SC 1602   at p. 1609) and there can be no doubt that an unregistered firm and an association of persons are closely analogous. If the income is earned by an association of persons, normally a return would be made or asked for under S. 22 from the association, and the income of the association would be brought to tax. If, it appears to thex Officer that by taxing the association of persons evasion of tax or escapement of tax liability may result, he is given a discretion to tax the individual members: but the discretion is to be exercised judicially and not arbitrarily, and its exercise is capable of rectification by superior authorities exercising judicial functions19. It cannot therefore be said that there is, by investing authority in thex Officer to select the association of persons or individual members thereof for the purpose of assessing to tax the income of the association, denial of equality before the law between persons similarly situate within the meaning of Art. 14 of the Constitution so as to render S. 3 insofar as it confers power upon thex Officer to select either the association of persons or the members thereof for assessment to tax in respect of the income of the association void. Appeals Nos.7 of 1966 must therefore fail22. There is nothing in the Act which indicates that a minor cannot become a member of an association of persons for the purposes of the Act23. In the case before US, there is abundant material to prove that Meyyappa (1), his minor son Chettiappa and M. S. M.M. firm formed an association in the year3 to25. We are not called upon in these appeals to consider whether the learned Judges of the High Court were right in the view which they have taken in so far as it relates to the assessment year. We areonly called upon to consider whether the conclusion of the Tribunal that in fact an association of persons existed in the year3 and subsequent years was based on any. In our judgment the facts proved clearly show that there was such an association in the years3 and the subsequent years. Pursuant to the three partitions no division by metes and bounds of the shares of the owners was made, only the shares in the income of the owner were entered in the books of account. There was common management of the properties, and there was even a common selling agency. Alagammal had acted as a guardian of Chettiapa in the deed of partition. The Tribunal inferred that Alagammal must have assented to the formation of the association on behalf of Chettiappa and in the various transactions relating to the entrustment of management. It is true that this finding related to the year2 as well, and the High Court has disagreed with that finding insofar as it related to the year. But on that account the finding of the Tribunal in respect of the subsequent years cannot be discarded. The Association which has earned income in the years3 and thereafter is an association different from the association in. In 1951 Chockalingam had demanded a share in the "properties M. M. Ipoh" and he was given a half share. The shares of Meyyappa (I) and Chettiappa in the properties were reduced, and thereafter ownership in the "properties of M. M. Ipoh" and its activities vested in an association formed by Meyyappa (I), the M. S. M. M. firm and Chettiappa. It is common ground that "M. M. Ipoh" was a trading venture and its management was entrusted in the relevant years to the M. S. M.M. firm26. The doctrine of res judicata does not apply so as to make a decision on a question of fact or law in a proceeding for assessment in one year binding in another year. The assessment and the facts found are conclusive only in the year of assessment the findings on questions of fact may be good and cogent evidence in subsequent years, when the same question falls to be determined in another year, but they are not binding and conclusive.The finding recorded by the High Court that in the year2 there was no association of persons constituted by Meyyappa (I) and Chettiappa for earning income from M. M. Ipoh properties will not in the present case have any effect on the finding of the Tribunal that in year3 and the subsequent years such an association existed. It must again be remembered that the association of persons which traded in3 and the subsequent years was an association different from the association in. After the reduction in the shares of Meyyappa (I) and Chettiappa in the "M. M. Ipoh properties" a fresh arrangement for entrustment of the management of the properties to the M. S. M.M. firm was necessary and according to the findings of the Tribunal, Alagammal assented on behalf of Chettiappa to that arrangementBut from readjustment of the shares in the "M.M. Ipoh properties", admission of Chettiappa to the benefits of M.S. M. M. firm, and the management of "M. M. Ipoh properties" to continuing to remain with the M. S. M. M. firm, with a common selling agency and the execution of the deed of partition by Alagammal an inference could reasonably be made that a person purporting to act as guardian of Chettiappa concurred forming the association and that the person so concurring was Alagammal. The finding recorded by the Tribunal is one of fact, and was not liable to be questioned before the High Court. It is also pertinent to note that the finding that Alagammal acted on behalf of Chettiappa in forming the association for the year3 was never challenged and was not sought to be made the subject of a question in an application to the Tribunal under S.66 (1) and no question in that behalf was referred to the High Court. It is true that the High Court was of the view that in the years3 to7 Meyyappa (I) acted on behalf of Chettiappa in forming the association.But the High Court in a reference under S. 66 of thex Act was incompetent to disturb what was essentially a finding of fact recorded by the Tribunal and arrive at another finding28. On the other question which has been answered by the High Court the Tribunal declined to submit a statement of the case, because in their view it did not arise out of their order. They pointed out that a ground in support thereof was taken in the memorandum of appeal but as it was not pressed before the Appellate Assistant Commissioner, they did not deal with it. The High Court observed that the Tribunal was bound to deal with the question irrespective of whether it was agitated before the Appellate Assistant Commissioner. Even assuming that the second question was properly raised in the form and in the manner in which it was raised by the High Court, the answer to the question must, on the facts found, be against the assessee. The High Courtgranted that application and without calling for a formal statement of the case on the question sought to be raised heard the parties. It may be reasonably assumed that the assessee was prepared to argue the case on the footing that the statements in the orders of thex Officer were correct. In the circumstances it must be held that thex Officer did serve a notice of his intention to treat a person connected with the association as the principal officer thereof. Thex Officer assessed the income of the association as represented by Meyyappa (I) its principal officer.There is, in our judgment, nothing in the Act which supports the contention of counsel for the assessee that before proceedings in assessment can commence against an association of persons a notice must be issued and an order passed after giving opportunity to the person proposed to be treated as the principal officer opportunity to show cause why he should not be so treated. It is open to thex Officer to serve a notice on a person who is intended to be treated as the principal officer. The person so served may object that he is not the principal officer or that the association is not properly farmed. Thex Officer will then consider whether the person served is the principal officer and whether he has some connection or concern with the income sought to be assessed.There is in thex Act an analogous provision in Section 43 of the Act which authorises thex Officer to treat a person as a statutory agent of theIn our judgment, the same principle applies to a case in which in the assessment of the income of an association of persons a person is to be treated as a principal officer of that association.If the person described as a principal officer of an association is duly served with a notice under S. 23 (2) in the manner prescribed by Section 63 (2), an adjudication of his status as the principal officer before assessment proceedings may take place is not obligatory. The order assessing the association containing a finding that the person served is the principal officer is sufficient compliance with the requirements of the statute. It is open to the association to challenge the finding of thex Officer in appeal before the Appellate Assistant Commissioner and in further appeal to the Appellate Tribunal. But the order declaring him as the principal officer of an association of persons will not be deemed to be void merely because the proceeding for assessment was not preceded by a declaration of the status of the person treated as the principal officer.