Mohamed Noorullah, Representing the
Estate of Late Kha Vs. The Commissioner of Income-Tax, Madras  INSC 17
(18 January 1961)
CITATION: 1961 AIR 1043 1961 SCR (3) 515
CITATOR INFO :
RF 1961 SC1261 (6) RF 1970 SC1707 (9)
Income-tax-Assessment of an association of
persons-Business carried on by Mohamedan-Continuance by heirs-Receivers
appointed by consent of parties-Assessment on the receivers as income of an
association of persons-Validity-Indian Income-tax Act, 1922 (11 of 1922), s. 3.
The business of manufacture and sale of a
particular brand of beedies was carried on by 0, a Mohamedan, who died in 1942
leaving a minor son, the appellant, by his pre-deceased wife, his widow L, and
four children by her. Proceedings were taken first by the appellant and later
on by L in connection with the partition of the properties left by 0, including
the business, and during the pendency of the proceedings the business was
carried on by receivers who had been appointed by the court by consent of
parties on May 17, 1943. The receivers continued the business till November 25,
1946, when during the course of the proceedings the business was put up for
sale by auction between the co-heirs and was purchased by the appellant. For
the years of assessment, 1944-45 to 1947-48, for which the accounting years
were 1943 to 1946, the profits of the business were assessed to income-tax in
the hands of the receivers as the income of an association of persons, and the
claim of the appellant that the shares of the profits of each of the co- heirs
should have been separately taxed was rejected by the income-tax authorities.
The facts showed that the business was inherited by the heirs of 0 and was carried
on without break during the accounting years first by L and another and then by
the receivers, that the nature of the business was such that it could not be
divided up and that all the parties desired that the business should be carried
on as one whole with a unity of control.
Held, that on the finding that the business
was carried on by the consent of all parties as one unit with unity of control,
the co-heirs did form an association of persons within the meaning of S. 3 of
the Indian Income-tax Act, 1922, and that the income of the business was
assessable as the income of an association of persons ; and the mere fact that
a suit was pending at the time for the administration of the estate of the
deceased or for the separation of the shares of the co-heirs did not affect the
incidence of taxation in the case.
Commissioner of Income-tax, Bombay v. Indira
Balkrishna,  3 S.C.R. 513, followed.
516 S. C. Mazumdar, Receiver, Trigunait
Brothers' Estate v. Commissioner of Income-tax,  15 I.T.R. 484,
disapproved in so far as it was contrary to the above decision of the Supreme
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 303 to 307 of 1960.
Appeals by special leave from the judgment
and order dated May 14, 1957, of the Madras High Court, in Case Referred No. 1
1 1 of 1953.
R. Ganapathy Iyer and G. Gopalakrishnan for
K. N. Rajagopal Sastri and D. Gupta, for the
1961. January 18. The Judgment of the Court
was delivered by KAPUR, J.-These appeals are brought by special leave against
the judgment and order of the High Court of Madras in an Income-tax reference
under s. 66(1) of the Indian Income-tax Act, hereinafter termed the "
Act". The question referred was :- " Whether the income-tax assessment
of the business of I Spade Clover Beedies' belonging to the estate of the
deceased and carried on during the previous years 1943 to 1946 as an
association of persons for the assessment years 1944-45 to 1947-48 is valid?
" And this question was decided in the affirmative and therefore against
The facts leading to the appeals are that one
Khan Sahib Mohamed Oomer Sahib, who was carrying on the business of manufacture
and sale of Spade Clover brand Beedies, died on December 17, 1942, leaving a
minor son Mohamed Noorullah (the appellant) by his pre-deceased wife, a widow,
Luthfunnissa Begum, and four children by her who were all minors at the date of
the death of Oomer Sahib. Noorullah through his next friend applied to sue in
forma pauperis and during the pendency of those proceedings two Advocates of
the Madras High Court were appointed joint receivers of the properties of the
deceased on March 17, 1943. This appointment was by consent of parties. On 517
May 10, 1943, the widow, Luthfunnissa, filed a suit for partition and also
applied for the continuance of the joint receivers. Noorullah opposed this
application but by an order dated May 25,1943, the receivers were ordered to be
continued and they carried on the business as before. In due course a preliminary
decree for partition was passed.
The High Court has observed that none of the
parties wanted to break the continuity of the business after the death of the
father. In the beginning Luthfunnissa and Dawood carried on the business and
from the date of their appointment, i.e., May 17, 1943, the joint receivers
continued the business till November 25, 1946, when during the course of the
proceedings the business was put tip for sale by auction between the co-heirs
and was purchased by Noorullah.
The years of assessment are 1944-45 to 47-48,
the relevant accounting years for which were the calendar years 1943 to 1946.
The profits of the business were assessed to tax in the hands of the receivers
as the income of an association of persons and the contention of the appellant
that the share of the profits of each of the co-heirs should have been
separately taxed, was rejected by the Income-tax authorities as well as by the
Income-tax Appellate Tribunal.
The only question which was raised both
before the department as well as before the Tribunal was the assessment to tax
of the income of the business. There was no dispute in regard to the income of
the properties which was taxed under s. 9(3) of the Act.
The business was inherited by the heirs of
Oomer Sahib and was carried on without break during the accounting years first
by the widow and Dawood and then jointly by the receivers. The nature of the
business was such that it could not be divided up and had to be carried on as
one whole with a unity of control and all the parties desired to preserve and
did preserve this unity. The opposition by the appellant to the application for
receivership filed on behalf of Luthfunnissa, the widow, was only on the ground
that the appellant wanted different persons to be appointed and not to the
continuance of the business or to the unity 518 of control. The Income-tax
Appellate Tribunal in its order stated :- " In fact, there was no change
in the continuity of the business and from the date of death of Md. Oomer Sahib
up to 24th March, 1943, the business was carried on by mutual agreement and
consent by Luthfunnissa Begum acting on her own behalf and on behalf of her
minor children and her minor step-son Md. Noorullah. There can, therefore, be
no gain saying the fact that immediately after the death of Md. Oomer his
estate was inherited and run by combination of individuals who had pooled their
resources for the common purpose of earning income. " And the High Court
has observed The opposition was apparently to the persons to be appointed
receivers and not to the continuance of the business or to the unity of control
that was necessary. Noorullah himself had realised that when he applied earlier
for the appointment of receivers to conduct the business among other things.
Despite Noorullah's opposition when Luthfunnissa asked for the continuance of
receivers in her application No. 1162 of 1943, the existence of the desire of
all the co-sharers including Noorullah for the continuance of the business with
proper persons to take charge of the business under the orders of court was
That intention was material on which the
departmental authorities and the Tribunal which agreed with them could find
that the co- sharers did constitute an 'association of persons'. " From
the finding of the Tribunal it is obvious that the business was such that it
was not capable of division, it being the manufacture and sale of "
Beedies " of a particular- brand and the finding of the Tribunal was that
the business was carried on with the consent of the parties.
On this finding it has to be decided whether
the business was the business of an " association of persons." and
its profits are assessable as such ? The contention of counsel for the
appellant was (1) that on the death of Md. Oomer his estate including the
business devolved upon his heirs in specific 519 shares; and (2) there was no
consensus of opinion between the heirs which is shown by the fact that the
appellant filed an application to sue in forma pauperis and before that
application could be decided the widow sued for partition and even though
receivers were appointed objection was taken by the appellant to the-'
appointment of receivers. But these facts do not assist the case of the
appellant. As has been said above, the business was in the first instance
carried on by the widow and Dawood on behalf of the heirs of Oomer and
subsequently when the suits were brought none of the parties wanted to break
the unity of control of the business nor its continuity and it was of such a
nature that it could not be carried on without such consensus and therefore the
receivers carried on the business. On these findings the High Court has rightly
come to the conclusion that the business was a business of an association of
This Court in Commissioner of Income-tax,
Bombay v. Indira Balkrishna (1) considered the question as to what an
association of persons means. The test laid down in three cases: In re B. N.
Elias & Others (2); Commissioner of Income-tax v. Laxmidas Devidas and
Another (3) and In re Dwarkanath Harischandra Pitale (4) was accepted by this
Court as correctly laying down the crucial test for determining what is an
association of persons and that in each case the conclusion has to be drawn
from the circumstances. In the first case the test was laid down as applying to
combinations of individuals who were engaged together in some joint enterprise
but not constituting a partnership. Such a combination of persons formed for
the promotion of a joint enterprise banded together as if they were "
coadventurers " it was held would constitute an asssociation of
individuals. In the second case, that is, Commissioner of Income-tax v.
Laxmidas Devidas and Another (3) Beaumont, C. J., at p. 589 laid down the test
as follows:- " In my opinion, the only limit to be imposed on the words
'other association of individuals' is (1)  3 S.C.R. 513.
(2)  3 I.T.R. 408.
67 (3)  5 I.T.R. 584.
(4)  5 I.T.R. 716, 520 such as
naturally follows from the fact that the words appear in an Act imposing a tax
on income, profits and gains, so that the association must be one which
produces income, profits or gains. It seems to me that an association of two or
more persons for acquisition of property which is to be managed for the purpose
of producing income, profits or gains falls within the words 'other association
of individuals' in s. 3; and under s. 9 of the Act, the Association of
individuals is the owner of the property and as such is assessable." In
that case it was also held that the fact that one of the assessees was a minor
during the year of the assessment did not affect the question. In re Dwarkanath
Harischandra Pitale (1) the assessees were two brothers who became entitled to
certain house properties as tenants in common and held and managed the
properties as such and derived profit there from. It was held that though the
assessees in the first instance did not constitute an association of
individuals, they became so when they elected to retain the property and
managae it as a joint venture producing income.
The test there laid down was that as soon as
there was election to retain the property and manage it as a joint venture the
persons so electing became an association of individuals. The Rangoon High
Court in The Commissioner of Income-tax, Burma v. M. A. Baporia and Others (2)
also laid down the same interpretation of the words " association of
individuals ". That was a case,, of Mohammedan co-heirs and it was held
that by merely inheriting a share of property no person can become a member of
an association of individuals unless there is some forbearance or act upon his
part to show that his intention and will accompanied the new status, that is,
an association of individuals. One of the co-heirs in that case was appointed
an agent to realise the income from the properties left to the co-heirs by
their father and mother under Mohammedan Law and that was held to be sufficient
to constitute them an association of individuals.
(1)  5 I.T.R. 716.
(2)  7 I.T.R. 225.
521 It is unnecessary to refer to other
cases. Taking the test as laid down by this Court in Indira Balkrishna's case
(1) it appears to us that the appellant and other co-heirs were rightly
assessed as an association of persons. No doubt a suit for partition had been
filed which was preceded by an application made by the appellant to sue in
forma pauperis, but the suit in reality was for ensuring the proper conduct of
the business and not its discontinuance. During the period that the suit was
pending and even before that, i.e., after the death of the father the business
was carried on by the consent of all parties as one unit as indeed it had to
be, because it had to be carried on as one unit with unity of control and
therefore the co-heirs did form an association of persons within the meaning of
s. 3 of the Act.
Counsel for the appellant relied on S. C.
Mazumdar,Receiver, Trigunait Brothers' Estate v. Commissioner of Income-tax
(2). That was a case of persons who formed a joint family being governed by the
Mitakshara School of Hindu Law. A suit for partition was filed and the court
appointed a receiver and a preliminary decree was passed but the receiver was
continued in regard to certain portion of the property and the income was
assessed by the taxing authorities as the income of an association of persons.
It was held that the income from property could not be taxed as such because
the shares of the parties were definite and ascertainable. The amount paid by
the lessees could not be taxed in a lump sum as being the profits of a business
carried on by an association of persons and the assessment was, therefore, made
in accordance with the provisions of s. 9(3). It was also held that the
assessees were not carrying on a trade or business themselves and there was no
association of persons as contemplated by the Act. But that case can be of no
assistance in the decision of the matter now before us. The income to be
assessed there was not income of any business carried on by or on behalf of the
assessees and it was held that letting out property was not a trade or
business. With regard to the income received by the receiver (1)  3
(2)  15 I.T.R. 484.
522 who employed contractors to carry on the
business of coal- cutting and raising it on the pit bead, it was held that that
was not the income of an association of persons on the ground (1) that the
receiver was in possession and he employed contractors for coal cutting and
raising of coal;
(2) that the assessees had no hand in the
business which produced royalty and (3) that the assessees had disassociated
themselves from each other because of this partition suit. In our opinion the
case so far as it relates to the carrying on of the business and in so far as
it is contrary to the opinion expressed by this Court in Indira Balkrishna's
case (1), is not correctly decided.
Another case relied upon by the counsel for
the appellant was Buldana District Main Cloth Importers' Group, Khamgaon v.
Commissioner of Income-tax, Nagpur (2). In that case a certain group of persons
were directed to import cloth in the district and had to work a scheme for the
distribution and sale of cloth which had been evolved by the District
authorities. That was held not to be an association of persons. It appears that
although they were appointed as a group of importers, all of them did not
participate in that scheme during the entire period. There were changes in the
personnel of the group from time to time and there was no compulsion to work
the scheme. On these facts it was held that the group did not agree to carry on
the business or share the profits. That case must be taken to have been decided
on its own facts and does not in any way affect the meaning of the phrase
" association of persons." Counsel also relied on Khan Bahadur M.
Habibur Rahman v. Commissioner of Income-tax, Bihar & Orissa (3 ) in which
a waqf deed was executed by which the assessee dedicated the income with
ultimate benefit to the poor and constituted himself the sole mutwali of the
trust. The deed provided that the beneficiaries should be benefited
concurrently and in the same proportion. It was held that s. 41(1) was
inapplicable and the assessee should, therefore, be taxed on the basis of
profits falling to the share of (1)  3 S.C.R. 513. (2)  30 I.T.R.
(3)  13 I.T.R. 189.
523 each beneficiary and not on the footing
that all the beneficiaries constituted an association of persons. Fazl Ali C.
J. (as he then was) there observed at p. 194:- " It seems to me therefore
that the finding of the Tribunal that there were only 24 persons who were
entitled to share the profits in the accounting year and that they were
entitled to equal shares therein must be accepted. As it does not seem to have
been contended that the assessee had any other relations than those enumerated
by the Tribunal who would be entitled to share the profits, it is academic to
discuss whether the various categories of persons referred to by the Appellate
Assistant Commissioner of Income-tax were included in the term 'family' or
not." On this ground the income was not assessed as the income of an
association of persons and that case "-as also decided on its own facts.
The question in the present case is as to
what income was to be taxed. The income was the income of a business which was
carried on as a single business by the consent of all the parties. The mere
fact that a suit was pending at the time for the administration of the estate
of the deceased or for the separation of the shares of the co-heirs does not affect
the incidence of taxation in this case, because the business was carried on, as
said above, as one business with unitary control and by the consent of the
parties. The High Court was right in holding that the income was assessable as
an income of an association of persons.
The appeals must, therefore, be dismissed
with costs. One hearing fee.