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TMI Blog1998 (3) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... Match Industries (B-Unit) run by Sankaralingam and his wife as trustees after partition cannot be assessed in the status of association of persons as such but should be assessed on each beneficiary individually ?" In the case of Ashok Match Industries (B-Unit), Sivakasi, the following questions of law have been referred in pursuance of the directions of this court : "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the income from the business of Ashok Match Industries (B-Unit) run by Sankaralingam and his wife as trustees after partition cannot be assessed in the status of association of persons as such but should be assessed on each beneficiary individually ? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that there was an absence of consent of the minor ?" In the case of Hariram Match Industries, Sivakasi, the Tribunal has referred the following questions of law under section 256(1) of the Income-tax Act, 1961, for our opinion : "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I am the karta of the joint family consisting of myself, my wife Thilagavathy, my sons, Rajaratnam and Chiranjeevi Ratnam. The joint family owns movable and immovable properties. I have decided to effect a partial partition of the properties of the joint family. In exercise of the powers as a Hindu father, I have effected a partition of the movable properties, shares in limited companies, investments in institutions and the shares in the partnerships, namely, Stanco Traders, Sivakasi, and Pany Company, Tirunelveli. The most beneficial way of partitioning the above movable properties benefiting the minor co-parceners is by effecting division by book entries evidencing partition, as the assets, namely, business of Standard Match Industries (with all its branches, shares in the partnerships) is incapable of physical division and carry on the said business and hold the assets in trust, so that the continuity is unbroken. I have already consulted my wife, Smt. Thilagavathy, who also considers the above as the best form of partition." On the next day, i.e., on August 31, 1974, the karta of the bigger-Hindu undivided family declared a deed of trust which, inter alia, states as under : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in equal shares for the beneficiaries to receive or be entitled to receive the income therefrom in equal shares." The deed of trust also provides that the trustees shall carry on the business of Standard Match Industries and also the shares in the two firms, namely, Stanco Traders and Pani Company, holding the same for the benefit of and on behalf of the beneficiaries in equal shares and to receive and be entitled to receive the income therefrom in equal shares. The trust deed also provides that Yennarkey R. Ravindran constituted himself as a trustee along with his wife, Thilagavathy. The Income-tax Officer closely examined the transactions and came to the conclusion that a scheme was adopted by Yennarkey R. Ravindran involving three distinct and successive steps and they are as under : "(i) The partition of the business assets of Standard Match Industries into three shares allotted to Shri Yennarkey R. Ravindran and, each of his two minor sons on August 30, 1974, the three persons becoming coowners (CWT v. J. K. K. Angappa Chettiar [1979] 116 ITR 456 (Mad)) of the assets. (ii) The second step, necessarily possible only after partition, by the three co-owners deciding to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd held that the assessee cannot be assessed in the status of association of persons. The reasoning of the Tribunal is as under : There is nothing in the terms of the deed of trust to indicate that the minors were expressly represented by their guardian and he has given his consent for carrying on the business and, therefore, there was no relationship between the karta and two minor sons so as to made, them coowners. The Tribunal also noticed that it is not possible to imply any consent by the guardian for and on behalf of the minors as the minors were incapable of giving consent and common interest could not be created by a single individual acting in different capacities. The Tribunal also held that the karta of two minor sons could not form an association of persons and the minors would be entitled to shares of profits in accordance with their shares as tenants-in-common and the karta would be liable to render an account of profits as a custodian of their shares and the creation of the trust deed did not make any difference to that position and it is difficult to infer the existence of an association of persons, The Tribunal also held that after the partition, the business was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, there was a volition or consent on behalf of the minors and the properties of the minors were brought into a common till. He submitted that after the partition, the co-owners combined together to run the business as a single unit and for that purpose the trust was formed and they carried on the business in the form of trust and the inference of consent could be drawn from the conduct of the parties. Learned counsel for the Revenue placed reliance on the following cases : (i) M. M. Ipoh v. CIT [1968] 67 ITR 106 (SC) ; (ii) G. Murugesan and Bros. v. CIT [1973] 88 ITR 432 (SC) ; (iii) M. M. Ipoh v. CIT [1962] 46 ITR 301 (Mad) ; (iv) N. V Shanmugham and Co. v. CIT [1971] 81 ITR 310 (SC) and (v) Meera and Co. v. CIT [1997] 224 ITR 635 (SC). Mr. Janarthana Raja, learned counsel for the assessee, on the other hand, submitted that there was no association of persons when there was a partition and the clauses of the partition make it clear that each one of them was entitled to a specific share. He, therefore, submitted that the trust has to be assessed under the provisions of section 160 of the Act when the business was carried on by the trustees with equal shares to the co-owners. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not has been brought within the net of taxation and the intention of the Legislature was clear to hit the combinations of individuals or other persons who are engaged together in some joint enterprise and the combinations may or may not be incorporated and a profit-yielding joint venture has to be taxed as a single unit. The decision of the Supreme Court in G. Murugesan and Bros. v. CIT [1973] 88 ITR 432 makes it clear that even a minor can join in an association of persons, if his lawful guardian has given consent. It is, in the light of the above two decisions of the Supreme Court, the correctness of the order of the Appellate Tribunal has to be examined. The Tribunal held that there is nothing in the deed of trust to indicate that the guardian expressly recorded his consent for carrying on the business. The reasoning of the Appellate Tribunal is incorrect as the Tribunal has overlooked an important fact that there was a partial partition of the business assets of the joint family and without the consent of the guardian of the minors, it was not possible to treat the properties of the minors as the trust properties. A reading of the trust deed clearly shows that the father as k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the consent could not be implied when the minors were represented by their mother is also erroneous in law. The facts of the case clearly show that after the partial partition of the joint family business assets, the parties agreed to carry on the business as a single and integrated unit and for that purpose, they decided to carry on the business through the medium of trustees. Therefore, the members by their own volition joined together and the purpose of the association was to generate income. Hence, the twin tests laid down by the Supreme Court in Meera and Co.'s case [1997] 224 ITR 635, are fully satisfied on the facts of the case. Their intention of earning income is manifest by their act in carrying on the business as a single unit and their intention to keep the business as a single unit shows that there was an intention to form a joint enterprise to earn income. The Supreme Court in the case of N. V. Shanmugham and Co. v. CIT [1971] 81 ITR 310 held as under : "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no partition, the profits from the entire business would have been assessed as a whole in the hands of the joint Hindu undivided family. Immediately after the partial partition, no doubt, there was a division of the properties of the business unit in favour of the karta and two minor sons, and if there was no trust, the karta would have carried on the business, not only with the assets obtained towards his share, but also with the shares belonging to the minors. The karta in that situation would have acted in two different capacities ; one as an individual owner and another as a natural guardian of the minor sons and if the business continued to be carried on as a single unit by combining together the divided properties, then, the entire profit might have been assessed in the hands of the single assessee, viz., either an association of persons or a body of individuals, as the case may be. The karta of the Hindu undivided family, instead of carrying on the business in two capacities in the above manner, created a trust, and in the deed of trust, the mother was added and the similar situation which continued before the formation of the trust and immediately after the partial partitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons. So, it is not a case wherein the members of the joint family were continuing after a mere division in status, without dividing the properties by metes and bounds, but, it is a case of a partial partition, division of the business assets in a manner permitted by law and then, execution of a deed of trust. The view of the Appellate Tribunal that the decision of this court in M. M. Ipoh's case [1962] 46 ITR 301 would apply to the facts of the case is clearly not warranted as there was an intermediary step of division of business assets in a manner known to law and then, there was a formation of trust. The Supreme Court in M. M. Ipoh v. CIT [1968] 67 ITR 106 in the appeal against the decision of this court in M. M. Ipoh v. CIT [1962] 46 ITR 301 for the subsequent assessment years, i.e., from 1952-53 onwards upheld the view of this court and held that there was an association of persons where there was a common management of the properties and a common selling agency and where the mother acted as guardian of the minor in the deed of partition and the conduct of the mother showed that she had even given assent to the formation of association on behalf of the minor and various tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a decision of the Supreme Court in CWT v. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555, wherein the Supreme Court approved the decision of the Bombay High Court in Balwantrai Jethalal Vaidya's case [1958] 34 ITR 187 and held that under the Wealth-tax Act, whenever an assessment is made on the trustees, it must be made in accordance with the provisions of section 21 of the Wealth-tax Act, 1957 (corresponding to section 161 of the Income-tax Act, 1961), and every case of assessment on trustees must necessarily fall under section 21 and that cannot be assessed apart from and without reference to the provisions of that section. He also relied upon a decision of this court in the case of CIT v. Venu Suresh Sanjay Trust [1996] 221 ITR 649. But, we are unable to accept the contention of learned counsel for the assessee. A similar contention was urged on behalf of the assessee before the Supreme Court in N. V. Shanmugham and Co. v. CIT [1971] 81 ITR 310, and the arguments urged on behalf of the assessee were rejected by the Supreme Court and the decision of the Supreme Court makes it clear that the liability to tax depends upon the earning of the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s along with their mother form a body to generate income, levy of tax under section 4 is on that body. The mother cannot insist that the income of the joint venture must be assessed separately on the minors and her even when a joint business is carried on." The above decision of the Supreme Court makes it clear that section 161 of the Act does not in any way affect the operation of the charging section 4 of the Act. It is relevant to notice here that the beneficiaries combined together for a common purpose to earn income and the business carried on by the trustees must be regarded as a business carried on by the trustees as an association of persons and it is permissible for the Department to make a single assessment on the trustees under section 4 of the Act and section 161 of the Act which is an enabling section cannot. in any way defeat the imposition of charge imposed on that body. Learned counsel for the assessee also placed reliance on the decision of the Karnataka High Court in CIT v. K. Shyamaraju (Trustees) [1991] 189 ITR 392 and the decision of the Bombay High Court in the case of CIT v. Marsons Beneficiary Trust [1991] 188 ITR 224. Both the Bombay High Court and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng a trust, though there was only a short interval between the date of partition and the formation of the trust, still in law, the two transactions brought about must be regarded as separate in point of character, separate in point of time and separate and distinct from the point of view of law, and however short the interval may be, the guardian had given consent not only for himself, but also for the beneficiaries to enable the trustees to carry on the business, and that would be sufficient to formulate them as an association of persons. Further, whether the time gap is short or long is an immaterial consideration, but the test that must be satisfied is whether there was an intention to join together to earn income and when the intention is spelt out from the conduct of the parties, the association would be regarded as an association of persons. A reading of the document clearly shows that the business was to be carried on without break and the mother of the minors was consulted and had mutually agreed which would be the best form to effect a partition of the joint family assets. It is also clear that the trustees have accepted the obligation imposed on them under the trust dee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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