High Court Of Kerala
CIT vs. Karunakaran & Ors.
Asst. Year 1975-76, 1976-77, 1979-80, 1980-81
T. Kochu Thommen & M. Fathima Beevi, JJ.
IT Ref. Nos. 56 to 59 of 1985
13th January, 1988
Menon, for the Revenue : A.K. Jose, for the Assessee
KOCHU THOMMEN, J.:
The following question has been, at the instance of the Revenue, referred to us by the 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 AOP or as a BOI and that the assessments can only be in respect of each co-owner of the business on his respective share of income ?”
The assessment years in question are 1975-76, 1976-77, 1979-80 and 1980-81. The assessees are the children of late C. Ramankutty Nair who died on 3rd May, 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 22nd May, 1971, giving up all their rights in the business. The ITO, for the assessment years in question, treated the sons as an AOP. He rejected the contention of the assessee 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 AAC who held that the assessees were liable to be assessed as a BOI. On further appeal by the assessees (and on cross-objection by the Revenue contending that the assessees were an AOP and not a mere BOI), 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 AOP or a BOI, but only as individuals.
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 AOP (or a BOI) 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 are 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 AOP.
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 becomes 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.”
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 AOP for the purpose of assessment. In Mohammad Aslam vs. CIT (1936) 4 ITR 412 (All) : TC44R.985, the Allahabad High Court pointed out that an AOP has some of the attributes of a firm or partnership though not in the strictly legal sense of the term. In CIT vs. Indira Balkrishna (1960) 39 ITR 546 (SC) : TC44R.916, the Supreme Court stated : “…….. an AOP 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.”
The Supreme Court cited with approval the judgment of Costello J. in In re, B. N. Elias (1935) 3 ITR 408 (Cal) : TC44R.913, where the learned judge stated : “… it may well be that the intention of the legislaure was to hit 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 whatever arises in the way of saying that…. these four persons did constitute an âassociation’…”
These observations show that wherever individuals employ their assets in a joint enterprise with a view to make profit, though not as partners, they constitute an AOP by reason of their common purpose or common action. In such an enterprise, the distinction between a firm and an AOP 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 from the conduct of the parties. In M. M. Ipoh vs. CIT (1968) 67 ITR 106 (SC) : TC44R.922, the Supreme Court categorically stated that there was no objection to a minor being a member of an AOP for the purpose of the IT Act, 1961.
The decisions relied on by the assessees’ counsel in G. Murugesan & Bros. vs. CIT (1973) 88 ITR 432 (SC) : TC44R.944 and CIT vs. A.P. Parukutty Mooppilamma (1984) 149 ITR 131 (Ker) : TC44R.1019 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, admittedly 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 AOP for the purpose of assessment under the IT Act, 1961.
In the circumstances, we answer the question in the negative, that is, in favour of the Revenue and against the assessees.
We direct the parties to bear their respective costs in these tax referred cases.
[Citation : 170 ITR 426]