1971 (12) TMI 40 - HC - Income Tax

Determination of the correct tax status for assessment purposes individual Hindu undivided family association of persons or body of individuals - partition of the businesses - capital of the businesses divided in equal shares between the three individuals - Interpretation of the expression association of persons - term body of individuals under the Income-tax Act 1961 - HELD THAT - An association of persons does not mean any and every combination of persons. It is only when they associate themselves in an income-producing activity that they become an association of persons. They must combine to engage in such an activity; the engagement must be pursuant to the combined will of the persons constituting the association; there must be a meeting of the minds so to speak. In a nutshell there must be a common design to produce income. If there is no common design there is no association. Common interest is not enough. Production of income is not enough. This interpretation of the expression association of persons flows from the meaning of the word association . When the word association is replaced by the word body it must follow that the feature of common design or combined will so peculiar or distinctive to an association of persons is not a characteristic of a body of individuals. The absence of a common design is what principally distinguishes a body of individuals from an association of persons. Another distinguishing feature is that the one refers to persons and the other to individuals. A person by definition includes an individual. But an individual apparently does not include a person. Under the 1922 Act there was some controversy whether the word Individual meant a natural person i.e. a human being only or whether it included an artificial juridical person. In the present Act an artificial juridical person is placed in a special category in section 2(31)(vii). Presumably an individual under the new Act means only a human being. These are the features which distinguish body of individuals from association of persons . The two expressions are placed alongside each other in section 2(31)(vii) because of the common characteristics possessed by them; both deal with combinations whether of persons or individuals who have a common interest and who are engaged in income producing activity. We are of the view that the expression body of individuals should receive a wide interpretation perhaps not wide enough to include a combination of individuals who merely receive income jointly without anything further as in the case of co-heirs inheriting shares or securities but certainly wide enough to include a combination of individuals who have a unity of interest but who are not actuated by a common design and one or more of whose members produce or help to produce income for the benefit of all. We are content to leave it at that. We will not attempt a comprehensive definition; nor will we attempt to catalogue the characteristics of a body of individuals. There is danger in doing either. Here the three individuals have a common interest in the businesses. The businesses are carried on for the benefit of all of them. They cannot constitute an association of persons because two of them are minors and their guardian is herself the third person of the combination and there is therefore none who can agree on their behalf with the third person. But though the businesses are not carried on pursuant to a common design they are carried on for their common benefit by one of them representing all of them. The three individuals in our opinion clearly constitute a body of individuals . The question referred to us is therefore answered in favour of the department.

Issues Involved:

1. Determination of the correct tax status for assessment purposes: "individual," "Hindu undivided family," "association of persons," or "body of individuals."
2. Interpretation of the term "body of individuals" under the Income-tax Act, 1961.
3. Applicability of the principle of ejusdem generis to the interpretation of "body of individuals."
4. Distinction between "association of persons" and "body of individuals."
5. Relevance of the Supreme Court's decision in Commissioner of Gift-tax v. R. Valsala Amma to the present case.

Issue-Wise Detailed Analysis:

1. Determination of the Correct Tax Status:

The primary issue in this case was the determination of the correct tax status for the assessment year 1966-67. Initially, the assessee was assessed under different statuses over several years: as an "individual," "Hindu undivided family," and later claimed the status of an "association of persons." For the year in question, the assessee argued that each individual (the mother and two minor children) should be assessed separately as "individuals" based on their one-third share of the business income, due to an alleged partition of the businesses. However, the Income-tax Officer assessed them as a "body of individuals," a decision upheld by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal.

2. Interpretation of "Body of Individuals":

The court examined the term "body of individuals" as introduced in the Income-tax Act of 1961. It was noted that the term was not present in the 1922 Act, which only mentioned "association of persons." The court emphasized that while the two terms are juxtaposed, "body of individuals" must have a distinct identity and meaning, as Parliament would not have introduced it otherwise. The court rejected the restrictive interpretation suggested by the learned authors and counsel, which equated "body of individuals" with co-executors and co-trustees.

3. Principle of Ejusdem Generis:

The court discussed the principle of ejusdem generis, which suggests that general words following specific words should be interpreted in the context of the specific words. However, the court concluded that this principle did not justify a restrictive interpretation of "body of individuals." The court pointed out that other provisions of the Income-tax Act, such as section 86(v), support a broader interpretation, as they contemplate scenarios where members of a "body of individuals" receive income from the body.

4. Distinction between "Association of Persons" and "Body of Individuals":

The court clarified that an "association of persons" involves individuals joining in a common purpose or action to produce income, profits, or gains. In contrast, a "body of individuals" does not require a common design or combined will. The court highlighted that while "association of persons" refers to persons, "body of individuals" refers to individuals, suggesting a distinction in scope. The court concluded that a "body of individuals" includes combinations of individuals with a unity of interest, even without a common design, where members produce or help produce income for the benefit of all.

5. Relevance of Commissioner of Gift-tax v. R. Valsala Amma:

The court addressed the reliance on the Supreme Court's decision in Commissioner of Gift-tax v. R. Valsala Amma, which dealt with the Gift-tax Act. The court noted that the context and considerations under the Gift-tax Act differ from those under the Income-tax Act. The case involved a gift of property by two individuals, and the court found it irrelevant to the present case, which involved the assessment of business income. The court emphasized the importance of context in interpreting statutory terms.

Conclusion:

The court concluded that the three individuals, having a common interest in the businesses carried on for their benefit, constituted a "body of individuals." The assessment for the year 1966-67 as a "body of individuals" was valid. The question referred to the court was answered in favor of the department, with costs awarded to the department.

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