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Commr. Of Income Tax v. Karunakaran & Others
Factual and Procedural Background
The case concerns the assessment years 1975–76, 1976–77, 1979–80, and 1980–81 involving the children of the late C. Ramankutty Nair, who died in 1971. The deceased was the sole proprietor of a gold business. After his death, his widow and daughters relinquished their rights in the business, leaving the sons as co-owners. The Income-tax Officer treated the sons as an association of persons for tax assessments, while the assessees contended that they were only co-owners and should be assessed individually. The Appellate Assistant Commissioner held the sons liable as a body of individuals. Upon further appeal, the Income-tax Appellate Tribunal held that the sons, particularly the minors who did not actively participate, were to be assessed as individuals and not as an association or body of individuals. The revenue referred the question of whether the assessment should be as an association of persons or as individuals to the High Court.
Legal Issues Presented
- Whether the Income-tax Appellate Tribunal was correct in holding that there could be no assessments as an Association of Persons or as a Body of Individuals in respect of the business carried on by the sons of the deceased.
- Whether the assessments could only be made in respect of each co-owner individually on his respective share of income.
Arguments of the Parties
Revenue's Arguments
- The sons should be treated as an association of persons for the purpose of income-tax assessment.
- The assessment as individuals is incorrect; the joint enterprise nature of their business warrants assessment as a collective entity.
Assessees' Arguments
- The sons were co-owners but not members of an association of persons or a body of individuals.
- They were liable to be assessed individually in respect of their separate shares of income.
- The minor sons did not participate in the business, thus negating the formation of an association or body of individuals.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Mohammed Aslam v. Commr. of Income-tax, (1936) 4 ITR 412 (Allahabad High Court) | An association of persons has some attributes of a firm or partnership though not strictly a partnership. | Supported the view that co-owners engaged in joint enterprise can be treated as an association of persons for tax purposes. |
| Commr. of Income-tax v. Indira Balakrishna, (1960) 39 ITR 546 (Supreme Court) | An association of persons must have two or more persons joined in a common purpose to produce income, profits, or gains. | Confirmed the necessity of common purpose or action to constitute an association of persons. |
| In re B.N Elias, (1935) 3 ITR 408 | Combinations of individuals engaged in joint enterprise but not partnerships can be treated as associations. | Reinforced the concept of association of persons based on joint enterprise without formal partnership. |
| M.M Ipoh v. Commr. of Income-tax, (1968) 67 ITR 106 (Supreme Court) | No objection to a minor being a member of an association of persons under the Income-tax Act, 1961. | Supported the inclusion of minor sons as members of the association due to guardian consent. |
| G. Murugesan & Brothers v. C.I.T, (1973) 88 ITR 432 (Supreme Court) | Related to associations not involving joint enterprise in the nature of business. | Distinguished from the present case as it did not involve a joint business enterprise. |
| Commr. of Income-tax v. Porukutty Moopllamma, 1984 KLT 65 | Also concerned with associations not involving joint business enterprise. | Held inapplicable to the present facts due to absence of joint enterprise. |
Court's Reasoning and Analysis
The Court examined the nature of the relationship between the sons as co-owners carrying on the deceased's business. It noted that mere co-ownership does not necessarily create an association of persons or partnership. However, when co-owners employ their assets in a joint commercial enterprise with a view to profit, this often assumes the character of a partnership or, failing that, an association of persons for income-tax purposes. The Court referred to authoritative legal principles and precedents establishing that an association of persons is characterized by a common purpose or action to generate profit. The Court found that the sons, including minors whose consent was inferred through guardianship, combined their assets and carried on the business as a joint enterprise. This joint activity with the objective of profit constituted an association of persons under the Income-tax Act, 1961. The Court distinguished the assessees' cited precedents as not involving joint business enterprises and thus not applicable. Accordingly, the Court rejected the Tribunal's conclusion that the sons should be assessed individually and held that they constituted an association of persons.
Holding and Implications
The Court answered the referred question in the negative, ruling in favour of the revenue and against the assessees.
This means that the sons are to be assessed as an association of persons for the purpose of income-tax assessment for the relevant years, rather than individually on their separate shares. The decision clarifies the application of the concept of association of persons in cases where co-owners jointly carry on a business with a view to profit, including where some members are minors represented by guardians. No new precedent was set beyond the application of established principles to the facts of this case.
Kochu Thommen, J.:— The following question has been, at the instance of the revenue, referred to us by the Income-tax Appellate Tribunal, Cochin Bench:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there could be no assessments either as an Association of Persons or as Body of Individuals and that the assessments can only be in respect of each co-owner of the business on his respective share of income?”
2. The assessment years in question are 1975–76, 1976–77, 1979–80 and 1980–81. The assessees are the children of the late C. Ramankutty Nair who died on 3-5-1971. He was the sole proprietor of a gold business. He left behind him his widow, 4 sons of whom three were minors, and six daughters among whom one was a minor. The mother and the daughters executed a deed of relinquishment on 22-5-1971 giving up all their rights in the business. The Income-tax Officer, for the assessment years in question, treated the sons as an association of persons. He rejected the contention of the assessees that they were not members of an association, but only co-owners of the business and as such were liable to be assessed as individuals in respect of their separate shares. The appeal of the assessees was dismissed by the Appellate Assistant Commissioner who held that the assessee were liable to be assessed as a body of individuals. On further appeal by the assessees (and on cross-objection by the revenue contending that the assessees were an association of persons and not a mere body of individuals) the Tribunal held that, in the absence of any volition on the part of the minor sons to participate in the business, they were not to be treated as an association of persons or a body of individuals, but only as individuals.
3. It cannot be, and it is not, disputed that the sons were co-owners of the assets left by their deceased father. The question, however, is whether as co-owners they were liable to be assessed as an association of persons (or a body of individuals) in respect of the business admittedly carried on by them after the death of their father. If the minor sons did not participate in the business and the business was carried on only by the major son, he alone would then be the sole proprietor of the business and assessable as such in respect of the income derived from the business. This would be the position even when the other sons were co-owners of the premises in which the business was carried on or of the assets which were lent to the business without participating in it. But that is not the case of the assessees. Their case is that they were also participants in the business, entitled to the income therefrom and liable for its losses, if any, but assessable only as individuals and not as an association of persons.
4. Lindley in his treatise on the Law of Partnership (15th Edn. p. 81) says:
“When, however, co-owners of property employ it with a view to profit, and divide the profit obtained by its employment, the difference, if any, between them and the partners become very obscure. The point to be determined is whether, from all the circumstances of the case, an agreement for a partnership ought to be inferred; but this is often an extremely difficult question.
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5. A commercial adventure of co-owners of assets with a view to obtaining and dividing the profits among them ordinarily assumes the characteristic of a partnership and is generally so regarded in law. If, however, their relationship falls short of a partnership by reason of any legal infirmity or for whatever cause, their activities in the pursuit of profit may still assume, albeit not in the strictly legal sense, some of the attributes of a firm or partnership, and they will be treated as an association of persons for the purpose of assessment. In Mohammed Aslam v. Commr. of Income-tax, (1936) 4 ITR. 412, the Allahabad High Court pointed oat that an association of persons has some of the attributes of a firm or partnership though not in the strictly legal sense of the term. In Commr. of Inc.-Tax v. Indira Balakrishna, (1960) 39 ITR. 546, 561, the Supreme Court stated:
“………an association of persons must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains………”
6. The Supreme Court cited with approval the judgment of Costello J., in In re B.N Elias, (1935) 3 I.T.R 408 where the learned Judge staled:
“………it may well be that the intention of the legislature was to bit 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………”
7. These observations show that wherever individuals employ their assets in a joint enterprise with a view to profit, though not as partners, they constitute an association of persons by reason of their common purpose or common action. In such an enterprise, the distinction between a firm and an association of persons may often be thin and sometimes very obscure. The fact that all but one of the sons in this case were minors is of no objection when consent to carry on the business together was granted on their behalf by their guardian. When the mother and the daughters relinquished all their rights in the business by a registered document and the sons together carried on the business, the consent of the mother as guardian was easily inferable by the conduct of the parties. In M.M Ipoh v. Commr, of Inc.-Tax, (1968) 67 ITR. 106, 116 the Supreme Court categorically stated that there was no objection to a minor being a member of an association of persons for the purpose of the Income-tax Act, 1961.
8. The decisions relied on by the assessees's counsel in G. Murugesan & Brothers v. C.I.T, (1973) 88 ITR. 432 (SC) and Commr. of Income tax v. Porukutty Moopllamma, 1984 KLT 65 do not help the assessees, for they did not relate to any joint enterprise in the nature of a business. In the present case, the sons of the deceased father, addmittedly being co-owners of the properties which devolved upon them, combined in a joint enterprise by carrying on their father's business and devoted their assets to its purpose with a view to profit. By reason of their common object or common activity, they constituted an association of persons for the purpose of assessment under the Income-tax Act, 1961. In the circumstances, we answer the question in the negative, that is, in favour of the revenue and against the assessees.
9. We direct the parties to bear their respective costs in these Tax Referred Cases.
10. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.
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