MANU/MH/0134/1981

Equivalent Citation: (1981)23C TR(Bom)120, [1982]138ITR699(Bom), [1981]7TAXMAN72(Bom)

IN THE HIGH COURT OF BOMBAY

Income-tax Reference No. 353 of 1980
Assessment Year: 1972-1973;1973-1974
Decided On: 14.01.1981
Appellants: Commissioner of Income Tax, Nagpur
Vs.
Respondent:Indramohan Sharma (No. 2)
Hon'ble Judges/Coram:
V.A. Mohta and M.N. Chandurkar, JJ.
JUDGMENT
M.N. Chandurkar, J.
1. The following four questions have been referred to this court under s. 256(1) of the
I.T. Act, 1961, at the instance of the Revenue :
"1. Whether, on the facts and in the circumstances of the case in holding the
orders of the Appellate Assistant Commissioner cancelling the assessments
framed by the Income Tax Officer in the status of an AOP ?
2. Whether the Appellate Tribunal was correct in holding that no association of
persons was in existence and the assessments framed in the status of an AOP
were not valid assessments ?
3 . Whether the Appellate Tribunal was correct in holding that no AOP was
formed by virtue of the memorandum of partition and the share income derived
from the firm did not belong to an AOP ?
4. Whether the notices issued u/s. 148/139 were invalid ?"
2. This reference arises out of assessment proceedings for the assessment years 1972-
73 and 1973-74 against the assessee, Indramohan Sharma, and other members of his
erstwhile joint family, consisting of himself, his wife and two minor sons, on the footing
that they were liable to be assessed as an association of persons. We have set out in
detail the facts relating to the partition between the assessee and the other members of
the joint family evidenced by the deed of partition dated 21st January, 1971, in our
order in Income Tax Reference No. 412 of 1978 decided on 14th January, 1981, CIT v.
Indramohan Sharma (No. 1) MANU/MH/0085/1981 : [1982]138ITR696(Bom) . We have
also in that reference constructed the legal effect of the partition deed vis-a-vis, the
income in the form of profits of the partnership which came to the share of the
assessee, Indramohan, who continued to be a partner in the firm by virtue of an
agreement contained in the deed of partition and we have held that the profits received
by the assessee, Indramohan, were received for and on behalf of the other members of
the erstwhile joint family, who were entitled to their respective shares in their won
independent right. It appears that after the income in the form of share of profits from

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 the partnership firm, M/s. Flour Millers Engineering Corporation, was assessed by the
ITO in the hands of the assessee as the income of the HUF, the ITO took the view that
the members of the erstwhile joint family of assessee, Indramohan, along with himself
were assessable on the income received through Indramohan in the status of an
association of persons. Holding that there was a failure on the part of the assessee to
file a return under s. 139 of the I.T. Act, and further holding that income taxable had
escaped assessment, the ITO proceeded under s. 147(a) of the Act and issued a notice
under s. 148 on 11th March, 1977. The ITO rejected the case of the assessee that the
erstwhile members of the joint family could not be assessed as an association of
persons. These orders for the two years in question were, however, set aside by the
AAC, who took the view that no association of persons or body of individuals or a firm
came into existence on the partition of the joint family. Following the decision of the
Gujarat High Court in Addl. CIT v. Chandulal C. ShahMANU/GJ/0118/1975 :
[1977]107ITR91(Guj) , he held that the assessment as an association of persons could
not be sustained and further, relying on the decision of the Tribunal in the appeal out of
which Income Tax Reference No. 412 of 1978 CIT v. Indramohan Sharma (No. 1) (see
p. 696 supra) arose, it was held that the agreement of partition created an overriding
title in favour of the erstwhile members of the joint family. The view of the AAC was
upheld by the Tribunal dismissing the appeals filed by the Department. That is how the
four questions, reproduced above, have been posed for decision.
3 . Shri Joshi, the learned counsel for the Revenue, contended that the erstwhile
members of the joint family had combined together in a common purpose for earning
profits from the partnership firm and though the erstwhile karta received the profits on
behalf of the other members of the joint family, even according to the terms of
partition, the assessment of the erstwhile members of the joint family as an association
of persons should be held to be permissible.
4. It is not possible for us to accept this contention. The finding given by the Tribunal
and confirmed by us in Income Tax Reference No. 412 of 1978 CIT v. Indramohan
Sharma (No. 1) (see p. 696 supra) was that when Indramohan received profits of the
partnership firm, he no doubt received them for himself as well as on behalf of the
erstwhile members of the joint family, but it was also held, in that reference, that each
erstwhile member of the joint family was entitled to his stipulated share of the profits in
his own right. On the terms of the partition deed, it was held that though the profits
were received by Indramohan on behalf of all the members of the erstwhile joint family,
the nature of the profits received was such that each one of them was severally entitled
to his respective share in his own right. Now, it is difficult for us to see how on this
finding recorded in respect of the partition deed executed on 21st January, 1971, which
is also annexed as annex. 'A' to the statement of the case in this reference, it can even
be contended that the members of the erstwhile joint family had joined in a common
purpose or had joined in any action or business. If an independent right in favour of
each one of the members of the erstwhile joint family is created in respect of a
particular stipulated share in the profits of the firm and each one thus has an
independent right against the erstwhile karta, merely because the karta received the
entire profits in a lump sum, it cannot be held that the member of the erstwhile joint
family formed an association of persons. In G. Murugesan & Brothers v. CIT
MANU/SC/0227/1973 : [1973]88ITR432(SC) , the Supreme Court, has reproduced the
observations regarding the concept of an association of persons. In the earlier judgment
of the Supreme Court in CIT v. Indira Balkrishna MANU/SC/0181/1960 :
[1960]39ITR546(SC) , after pointing out that "to associate" means "to joint in common
purpose, or to join in an action", the Supreme Court has observed as follows (p. 551) :

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 "Therefore, an association of persons must be one in which two or more
persons joint in a common purposes or common action, and as the words occur
in a section which impose a tax on income, the association must be one the
object of which is to produce income, profits or gains."
5. The pre-condition for persons being assessed as an association of persons, therefore,
is that there must be an association, the object of which must be to produce income,
profits or gains. It can hardly be disputed that when there is a disruption of the joint
family, each member of the joint family holds the property which falls to his share as an
owner in his own right. By the mere fact of partition no association of persons is
brought into being. Indeed, if the effect of partition is that each member is separated in
status and estate from another, unless there is some further act on the part of such
members on the basis of which an inference is drawn that they have combined or joined
in a common purpose, it would be difficult to hold that they formed themselves into an
association of persons as contemplated by the I.T. Act. The right to receive the
stipulated share of profits from the partnership firm, where the erstwhile karta
continued to be a partner, did not flow from any agreement between the parties to carry
on any common venture, but that right flowed from the right of a separated member of
a Hindu joint family as a result of partition, It is, therefore, difficult to accept the
contention raised on behalf of the Revenue that the different members of the family of
the assessee, after partition, could be assessed as an association of persons. The
finding recorded by the AAC and the Tribunal that the action of the ITO in proceeding to
assessee the members of the erstwhile joint family as an association of persons is
invalid is justified in law. The answer to all the four questions would flow from this
conclusion and would be against the Revenue. The questions are thus answered as
follows :
6. Question No. 1 : In the affirmative and against the Revenue.
7. Question No. 2 : In the affirmative and against the Revenue.
8. Question No. 3 : In the affirmative and against the Revenue.
9. Question No. 4 : In the affirmative and against the Revenue.
10. Revenue to pay the costs of this reference.

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