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TMI Blog1985 (4) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1968. In the deed, it was mentioned that, after the death of Karodimal, it was decided to continue the business of the firm and that is how the fresh partnership deed came to be executed. For the assessment year 1970-71 with which we are concerned, the share income from that partnership had to be determined. She admitted 1/7th of her share in the firm on the ground that, after the death of her husband, she stepped into his shoes as a partner in the firm and, therefore, she represents her six minor children also, since all of them are the legal heirs of her deceased husband. It was also stated that the entire capital standing in the name of her husband has been left in the firm as capital in her name and that all the seven of them are entitled to 1/7th share each. It is on that ground she claimed that what was assessable in her hands was only 1/7th of the share arising from the firm. The ITO negatived her claim and assessed the entire share income in her hands treating it as income of the assessee. She then preferred an appeal and the AAC dismissed the appeal agreeing with the findings of the ITO. Then she preferred a further appeal to the Tribunal and the Tribunal, confirming the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncern devolved on the heirs, i.e., " a body of individuals ", but a case of partnership where the widow of the deceased had only 1/7th right to the 30% investment made by the deceased. This contention he puts forth on the basis of the claim made by the widow that the entire capital standing in the name of her husband had been left in the firm in the name of the assessee and that the minors were, therefore, entitled to the benefits of it to the extent of 1/7th share each in accordance with the provisions of s. 19 of the Hindu Succession Act. Having regard to the importance of the question and to the fact that a question of this nature is likely to arise quite often and in view of the opinion expressed by Palkhivala in his " Law and Practice of Income Tax, sixth edition, Vol. I, page 825, we are inclined to refer the question referred for the decision of a Full Bench. Post the reference before a Full Bench of three judges. JUDGMENT OF FULL BENCH The judgment of the court was delivered by RAMANUJULU NAIDU J.-One Sri Karodimal was a partner in the firm, M/s. Mysore Khandasari Sugar Mills, Mukthiargunj, Hyderabad, carrying on the business of manufacture and sale of khandasari sug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erties, whatever they are, would devolve on his heirs under section 8 of the Hindu Succession Act since Karodimal died intestate. Section 19 of the said Act further states that the property inherited by the heirs of the deceased under section 8 would be held by them as tenants-in-common. Therefore, all the properties including the interest of the deceased in the firm of M/s. Mysore Khandasari Sugar Mills, had devolved on the legal heirs, viz., the wife and the children of Shri Karodimal, as tenants-in-common. On the death of Shri Karodimal, his heirs could have demanded the interest of Shri Karodimal in the firm. There are well-established principles in regard to determination of the interest of a partner, but that has not been done here. On the other hand, the capital standing in the name of Shri Karodimal has been retained in the business of the firm. At this juncture, we would like to point out that the Income-tax Officer is not correct in stating that the capital standing in the name of Shri Karodimal has not been taken as the capital of the widow, Smt. Panna Bai. From the accounts, it is clear that the balance standing in the account of Shri Karodimal has been transferred to S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this court : " (i) Whether, on the facts and in the circumstances of the case, the share income derived from the firm can be taxed fully in the hands of the assessee or only 1/7th of the share income representing only her share in the said share income be taxed in her individual hands? (ii) Whether, on the facts and in the circumstances of the case, the Honourable Tribunal is correct to direct that the assessee may be taxed in the status of 'body of individuals' and be taxed as one unit only ?" The Tribunal after drawing up a statement of the case, however, referred only the first question presumably under the impression that it is comprehensive enough to take within its ambit the second question also. We therefore, proceed on the assumption that both the questions were referred by the Appellate Tribunal. The reference came up before a Division Bench of this court was urged on behalf of the assessee that under s. 19 of the Hindu Succession Act, if two or more heirs succeeded together to the property of an intestate, they would take the property Per capita and as tenants-in-common and that the Tribunal erred in not assessing the income derived from the firm to the extent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each had a definite half share, that each must, therefore, be considered to have gifted her half share of the property, that they did not make the gift as an association or a body of individuals, though the gift was made through one single document and that it, was surprising that the ITO or the AAC or the Tribunal should have ever thought that the gift in question was by an association or by a body of individuals. It may be thus noted that according to the Supreme Court, persons holding property as tenants-in-common, each one having a distinct defined share in that undivided property, cannot be said to be an " association of persons " or a " body of individuals " for the purpose of gift-tax. In Deccan Wine and General Stores v. CIT [1977] 106 ITR 111 (AP) the facts were: Late Pannalal ran certain businesses known as " Deccan Wine and General Stores Moti Wine and General Stores " and " Tinu's Bar and Hotel " On his death in 1959, his heirs, his widow and two minor children succeeded to the three businesses. For the assessment years 1959-60 and 1960-61, assessments in respect of the income from the three businesses were made as if the assessee's collective status was that of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. These are the features which distinguish 'body of individuals' from " association of persons ". The two expressions are placed along side each other in section 2(31)(vii) because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iduals, the business was gifted by them as a body of individuals ". In the result, the Division Bench held that the three individuals had a common interest in the businesses, that the businesses, though not carried on pursuant to a common design, were carried on for their common benefit by one of them representing all of them and that the three individuals clearly constituted a body of individuals. In Meera and Co. v. CIT [1979] 120 ITR 564 (P H), the interpretation placed by the Division Bench of this court in Deccan Wine and General Stores v. CIT [1977] 106 ITR 111 (AP) upon the expressions, " association of persons " and " body of individuals " employed in the inclusive definition of " person " contained in s. 2(31) of the I.T. Act found full acceptance with a Division Bench of the Punjab and Haryana High Court. In CIT v. Harivadan Tribhovandas [1977] 106 ITR 494 (Guj) a Division Bench of the Gujrat High Court had an occasion to examine the scope of the expression, " body of individuals " occurring in s. 2(31) of the I..T. Act and in the course of its discussion, the Division Bench expressed full agreement with the following observations made by the Division Bench of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, the members had owned the properties not yet divided by metes and bounds as co-owners, that there had been no community of profit or loss, that the income accrued directly to the members, that it was only for the sake of convenience the same was received by one of them and that, therefore, the members were assessable as individuals. On a reference to the High Court of Kerala, it was held that the fact that the assessees had originally referred to themselves as a " body of individuals " was irrelevant, that the status of the assessee was not "body of individuals", that the erstwhile members of the HUF were assessable directly as individuals and that the Tribunal was right. In the course of its discussion, the Division Bench of the Kerala High Court referred to the well-recognised rule of construction collected from interpretation of Statutes by Maxwell (10th edn., p. 332) and quoted with approval by the Supreme Court in Ranganathan v. Government of Madras [1955] 25 Comp Cas 344 ; AIR 1955 SC 604, the rules of construction being, " that when two or more words which are susceptible of analogous meaning are coupled together noscuntur a sociis, they are understood to be used in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Bench held that the reasoning and the conclusion of the Tribunal holding that the status of the assessee could not be a " body of individuals " was well justified and that the individual members should be assessed directly regarding the capital gains, as held by the Tribunal. In CIT v. Deghamwala Estates [1980] 121 ITR 684 (Mad), a Division Bench of the Madras High Court held that mere execution of a document of sale by two or more persons owning the property jointly could not bring the co-owners together as a body of individuals and that there must be, something more than joining together and executing the document to constitute them as a " body of individuals ". In the, course of its discussion, it was observed (p. 689): "Thus, in order to constitute an association of persons, there must be joining together in a common purpose or in a common action, the object of which is to produce income, profits and gains....... (p. 691). The word 'body' would require an association for some common purpose or for common cause or there must be unity under some common tie or occupation. A mere collection of individuals without a common tie or a common aim cannot be taken to be a body of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividuals." In CIT v. Pabbati Shankaraiah [1984] 145 ITR 702 (AP), the facts were that one Shankaraiah was the karta of a HUF consisting of himself, his wife, his major son and two minor sons. He was a partner in a firm having 30 per cent. share therein. The income derived by him from the firm was being assessed in the hands of the HUF up to and including the assessment year 1964-65 as he was a karta of the family. On October 26, 1963, there was a partial partition in the family in respect of the interest of the family in the firm. At the partition, Shankaraiah was allotted 12 per cent. share while the other sons were each allotted 6 per cent. share. The capital standing in the name of Shankaraiah in the firm, which admittedly belonged to the joint family, was divided into four equal shares and necessary entries were also made in the books of the firm. It was also agreed that Shankaraiah should continue as a partner and that the profits derived by him should be divided between himself and his three sons in proportion to the shares allotted to them. Another agreement was subsequently brought into existence whereunder it was made clear that the sons should have no rights in the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es after the death of the individual. On a reference made to this court, it was held by a Division Bench consisting of Seetharam Reddy and Jagannadha Rao JJ., that Shankaraiah and his two minor sons did not constitute a " body of individuals ", that the agreement entered into by Shankaraiah with his two minor sons created an overriding obligation on Shankaraiah to make over to the minors, the income derived from the firm in proportion to their shares and that in any event Shankaraiah could be said to have received the income from the firm as a constructive trustee with an obligation to hold the same for the benefit of his two minor sons under ss. 81, 90 and 94 of the Indian Trusts Act. The decision in Deccan Wine and General Stores v. CIT [1977] 106 ITR I II (AP) of the earlier Division Bench of this court was distinguished on the ground that there was nothing explicit or implicit to spell out from the deed of partition or the subsequent document that there was any unity of interest or that Shankaraiah was producing income for his two minor sons or was carrying on business of the firm for the common benefit of himself and his two minor sons so as to constitute a " body of indiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained in ss. 81, 90 and 94 of the Indian Trusts Act to the assessee therein was also not adverted to, that the decision, therefore, required reconsideration, that in any event the test laid down by the Supreme Court in the case of Valsala Amma [1971] 82 ITR 828 (SC), though decided under the G.T. Act, would equally govern a case arising under the corresponding provisions of the I.T. Act, that the distinction of the case of Valsala Amma attempted by the Division Bench was without any difference and that it was rightly dissented from by the High Courts of Gujarat, Madras and Kerala. In our considered view, it is unnecessary to pronounce upon the correctness or otherwise of the decision rendered in Deccan Wine and General Stores v. CIT [1977] 106 ITR 111, as the Tribunal, having held that the assessment of Smt. Panna Bai in the status of an individual was incompetent, to modify or alter or convert the status of the individual to that of a body of individuals consisting of Smt. Panna Bai and her six minor children without notice to that body of individuals mandatorily required under s. 139(2) of the I.T. Act, 1961. In CWT v. Srivastava Sons [1983] 142 ITR 183 (All), the facts we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d upon the decision of a Division Bench of the High Court of Punjab and Haryana in Mangat Ram Hazari Mal v. CIT [1968] 67 ITR 788. The facts in the said case were that three individuals and a firm consisting of four partners, formed themselves into a partnership and applied for registration as firm under s. 26A of the I.T. Act. Registration was refused on the ground that one of the partners was a firm and the partnership was assessed as an unregistered firm by the ITO, and this assessment was upheld by the AAC. On further appeal, the Tribunal took the view that the partnership was not a firm " at all and assessed it in the status of an " association of persons It was contended that the Tribunal had no power to uphold the assessment changing the status of the assessee but could only annul the assessment or remand the case to the ITO to make a fresh assessment on the assessee in the status of an " association of persons ".. On a reference made at the instance of the assessee, it was held that the assessee was an " association of persons " and not a " firm " and that the Tribunal had power to uphold the assessment changing the status of the assessee into that of an association of pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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