1973 (9) TMI 25 - HC - Income Tax

Liability to pay tax - Body of Individuals - brothers holding the property jointly - Distribution of capital assets - partition of the Hindu undivided family - capital gains or Not - Nature of the Land as Agricultural Land - agricultural income - Definition of the word Person u/s 2(31) - HELD THAT - It is clear from the test laid down by the Supreme Court in Indira Balkrishna s case 1960 (4) TMI 7 - SUPREME COURT and reiterated In G. Murugesan and Brothers v. CIT 1973 (2) TMI 1 - SUPREME COURT that in order to form an association of persons within the meaning of the Income-tax Act there must be a body of individuals who are joined together for the purpose of producing income. In the instant case the assessee and his two brothers who merely held the property jointly after the partition by metes and bounds arrived at in 1958 cannot be said to be an association of persons . The question then arises whether the assessee and his two brothers between 1958 and March 24 1961 can be said to be a body of individuals . Though the principle of ejusdem generis cannot be applied to the definition of the word person occurring in section 2(31) since there is no specific genus to which an individual a Hindu undivided family a company a firm or an association of persons can be said to belong the principle of noscitur a sociis can certainly apply in the facts of this case. The body of individuals with which the Income-tax Act is concerned must be carrying on an activity with a view to earn income because it is only with such a body of individuals that the Income-tax Act is concerned and again the words derive colour from the context in which they occur namely an association of persons and therefore in our opinion the only course open to us as a matter of interpretation is to attribute the second meaning out of the three meanings set out hereinabove to the words body of individuals . We therefore hold that the words body of individuals occurring in the Income-tax Act in the definition of the word person in section 2(31) means a conglomeration of individuals who carry on some activity with the object of earning income. In the instant case follow the procedure which the Supreme Court followed in Commissioner of Income-tax v. Indian Molasses Co. P. Ltd. 1970 (8) TMI 9 - SUPREME COURT . It is obvious on the facts of the case before us that the Income-tax Appellate Tribunal has not applied the proper test for determining what constitutes a body of individuals for the purposes of the Income-tax Act and particularly in section 47(ii). Secondly the Tribunal has not considered and applied its mind to the question whether this particular plot of land namely survey No. 170-1 was agricultural land or not. If we were to call for a supplementary statement of the case the Tribunal would be bound to submit the supplementary statement on the basis of the evidence on its own record and would not be entitled to take additional evidence and that might work hardship to both sides. Under these circumstances we decline to answer the question referred to us on the ground that the Tribunal has failed to consider and decide the two questions (1) whether the assessee and his two brothers constituted a body of individuals in the sense that they were a combination or conglomeration of persons who carried on some activity with the object of deriving income therefrom ; and (2) whether this particular survey No. 170-1 was agricultural land? It is obvious that if it was agricultural land at the relevant time the one-third share of the assessee in that plot of land would not be a capital asset and the transfer of that one-third share would not attract the provisions of section 45 of the Income-tax Act. It would be open to the Tribunal to dispose of the appeal before it under the provisions of the law and in the light of the observations made by this court after determining the questions which ought to have been decided. There will be no order as to costs of this reference.

Issues Involved:

1. Whether the case of the respondent was covered under clause (ii) of section 47 of the Income-tax Act, 1961, and therefore, there was no capital gains made by the respondent liable to tax.
2. Whether the assessee and his two brothers constituted a "body of individuals" for the purposes of the Income-tax Act.
3. Whether the land in question was agricultural land and thus not a capital asset under the Income-tax Act.

Issue-wise Detailed Analysis:

1. Applicability of Section 47(ii) of the Income-tax Act, 1961:

The primary issue was whether the distribution of capital assets on the dissolution of a "body of individuals" exempted the transaction from being considered a transfer under section 45, thus not attracting capital gains tax. The Tribunal initially ruled that the assessee's case fell under section 47(ii), as the three brothers were considered a "body of individuals" who jointly owned the property. The Tribunal concluded that upon dissolution, the distribution of assets among the brothers did not constitute a taxable transfer. However, the High Court observed that the Tribunal failed to apply the correct legal tests for determining the existence of a "body of individuals."

2. Definition and Existence of a "Body of Individuals":

The High Court examined whether the assessee and his brothers formed a "body of individuals" under the Income-tax Act. It was noted that the term "body of individuals" was not explicitly defined in the Act. The Court considered several interpretations, ultimately rejecting the notion that any mere conglomeration of individuals could be a "body of individuals." Instead, the Court favored an interpretation requiring the group to carry on some activity with the object of earning income. The Court highlighted that the Tribunal did not adequately assess whether the brothers engaged in any income-generating activity as a collective entity, thus failing to establish them as a "body of individuals."

3. Nature of the Land as Agricultural Land:

The High Court also addressed whether the land in question was agricultural, which would exclude it from being a "capital asset" under section 2(14) of the Income-tax Act. The Tribunal had not conclusively determined whether the land was agricultural. The High Court pointed out that if the land was indeed agricultural, any gains from its transfer would not be subject to capital gains tax. The Court emphasized the need for the Tribunal to consider evidence regarding the agricultural nature of the land, as this was crucial for determining the applicability of capital gains provisions.

Conclusion and Directions:

The High Court declined to answer the referred question due to the Tribunal's failure to properly consider whether the brothers constituted a "body of individuals" and whether the land was agricultural. The Court directed the Tribunal to reassess these issues, allowing for the introduction of additional evidence if necessary. This approach was intended to ensure a fair resolution based on a comprehensive examination of relevant facts and legal principles. The Court left it open for the Tribunal to dispose of the appeal in accordance with the law and the observations made by the High Court. There was no order as to costs of the reference.

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