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TMI Blog1983 (4) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... g the karta of it. The share income from the firm was being assessed in the hands of the HUF up to and including the assessment year 1964-65. On October 26, 1963, there was a partial partition in the family, which was reduced to writing by a memorandum. This partial partition was only in respect of the interest of the family in the aforesaid firm. The division was effected by allotting 12% to Shankaraiah and 6% to each of his sons. 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 as on October 26, 1963. Respective accounts were opened in the books of the firm crediting the amounts divided. It was further agreed that Shankaraiah should continue to remain as a partner vis-a-vis the partnership firm and the profit derived by him will be divided between himself (12%) and the three sons at 6% each. Some movables as well as immovable assets were not divided. On October 26,1963, another agreement was brought into existence. This agreement, having recognised the partial partition between Shankaraiah and his sons, further mentioned that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a unity of interest but who are not actuated by a common design, and one or more of whose members produce or help to produce income for the benefit of all. " In the appeal filed by the assessee, there was no reference to this aspect as the only question argued was with regard to the legality of the notice issued under s. 148. Thereafter, the ITO passed the assessment orders for those years on the ground that the share income held in the name of any one of the undivided family members is to be assessed in the hands of " body of individuals ". Thus he brought to tax 24% share of the profit from the firm of M/s. T.L. Jagannadham Son in the hands of "body of individuals". He, however, had not taken into account the share income of the major son, Veeraiah, which he received by virtue of his independent right as a partner of the said firm. On second appeal, the Appellate Tribunal placing reliance on a decision in CIT v. Harivadan Tribhovandas [1977] 106 ITR 494 (Guj), held : "The Tribunal in extenso quoted some of the observations of the Gujarat High Court and applied the tests laid down therein. Applying those tests, the Tribunal held that there was no 'body of individuals' in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal rejecting the argument of the Revenue that the arrangement, which was entered into, brought about a " body of individuals ", as one of the body of the individuals earned money by being a partner and sharing the profits thereof among the members of the body, held that for division of the share of the partnership there was no need for any agreement for passing of the share to the divided members. In this case it was by mutual agreement that Shankaraiah alone has continued as partner but at the same time the interest of Sankaraiah was that of the family and that interest having been divided all the members were entitled to a share in that interest. The Tribunal, therefore, found that this sort of division is one of the accepted modes of division of interest of the properties of a joint family and there can be no objection to the same It was also observed by the Appellate Tribunal: " The Tribunal also stated that even though a specific agreement entered into by the parties, Shankaraiah would be under an obligation to pass on the share income to the divided members as per the partial partition. " The above conclusion of the Tribunal was reached on the basis of the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstituted their income right from the inception. If it was their income although it cannot at the same time be the income of a " body of individuals ' allegedly consisting of the father and the two minor sons to be assessed as separate unit of assessment, and (3) that in any event the father and two sons did not constitute "body of individuals " for the purpose of assessment under the I.T. Act. Relevant material: Before adverting and analysing the arguments and the counter-arguments of the parties, the relevant statutory provisions and also the materials contained in the memorandum of partition and the agreement to share may be noticed. Section 2(31) of the I.T. Act, 1961, reads as under : " person ' includes (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses; MEMORANDUM OF PAST PARTITION "This Memorandum of Past Partition is executed this 26th day of October, 1963, between: 1. Pabbati Shankariah, son of Veeraiah aged about 47 years, res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the share in reserve and insurance policies shown in schedule " C " hereto were allotted to party No. 1 in the said partition on October 26, 1963, and continued to be separate and personal properties of the said first party Pabbati Shankariah, son of Veeraiah ...... SCHEDULE " C" Movable assets provided to Sri P. Shankaraiah (1) Amount of Rs. 14,531.56 Ps., being 1/4th share of capital in the firm of M/s. T. L. Jagannadham Son, Warangal. (2) Insurance Policy No. 12625961 Dt. 28-12-1957 for Rs. 2,000 to be matured on 28-12-1972. Annual premium Rs. 147. (3) Insurance Policy No. 12673032 Dt. 28-11-1959 for Rs. 2,000 to be matured on 28-11-1969. Annual premium Rs. 220.88. (4) Re. 0-4-9 share in the firm of M/s. T. L. Jagannadham Son. (5) Share in reserve of the said firm. AGREEMENT This agreement is executed this 26th day of October, 1963, Between : 1. Pabbati Shankaraiah, son of Veeraiah, aged about 47 years, resident of Warangal, hereinafter called " the first party " 2. Pabbati Raja Veeraiah, son of Shankaraiah, aged about 22 years, resident of Warangal, hereinafter called " the second party ". 3. Pabbati Samba Murthy, son of Shankaraiah, aged about 15 years, resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the losses falling to the share of the first party in proportion to which the parties 2, 3 and 4 are entitled to the profits in that share. In case the parties 2, 3 and 4 wanted to join in the partnership in the said firm of " Mrs. Thota Lingaiah Gari jagannadham Son ", the first party shall surrender out of Re. 0-4-9 (equivalent to 30 Ps) share held by him one anna share (equivalent to 6 Ps.) to each one of them who claims to join as a partner with the consent of all the partners in the said firm. Anyone out of parties 2, 3 and 4 that may be admitted in partnership shall be entitled to a share in the reserve of the said firm provided he or they undertakes to adopt the assets and liabilities of the said firm at book values. As and when any of the parties 2, 3 and 4 becomes partners in the said firm of " M/s. Thota Lingaiah Gari Jagannadham Son " the first party is not liable to pay the profits to said persons as per this agreement. 5. Party No. 2 and the guardian and mother for each of the parties 3 and 4 have agreed to keep Rs. 12,000 (Twelve thousand) either with the first party or with the firm of M/s. Thota Lingaiah Gari jagannadham Son, Warrangal, towards the share of 6 Ps ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was claimed that each of the three individuals, i.e., the mother and the two minor children (the children continued to be minors) should be separately assessed in their " individual " status on their respective one-third share of the income from the business. It was pointed out in the letter that in the course of the year of account there was a partition of the businesses in the sense that the capital of the businesses was divided in equal shares between the three individuals. The ITO did not accept the plea that the three persons should be separately assessed as individuals. The ITO held that the three persons constituted a " body of individuals " and should be assessed as such and not as an " association of persons " either. The order of assessment made by the ITO was confirmed by the AAC and the Income-tax Appellate Tribunal. On a reference the question that was answered by the High Court was " whether, on the facts and in the circumstances of the case, the assessment for the assessment year 1966-67 has been validly made in the status of a " body of individuals " ? HELD : " We are of the view that the expression 'body of individuals 'should receive a wide interpretation, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t proceedings for the assessment year 1962-63, the Income-tax Officer sought to assess the amount of Rs. 18,230 as capital gains. On appeal, the assessee contended that the lands comprised in survey No. 170-I were agricultural lands and, alternatively, that the assessee and his brothers were a body of individuals. The Tribunal, on the view that a 'body of individuals' is any group of individuals whatsoever irrespective of the object which brought them together and irrespective of the activities which they carry on, held that the assessee and his brothers, in so far as they were joint owners of the property, constituted a body of individuals and so fell within the exemption under section 47(ii). " While refusing to answer the question, the High Court observed that the Tribunal had failed to consider and decide the two questions : (i) Whether the assessee and his brothers constituted a " body of individuals " in the sense that they were a combination of persons who carried on some activity with the object of deriving income therefrom, and (ii) whether the particular lands were agricultural lands ? It was further held (head note): " The words " body of individuals " occurring in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat mere execution of a document of sale by two or more persons owning the property jointly cannot bring the co-owners together as a body of individuals. There must be something more than joining together and executing the document. It was further held (headnote): " 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. Though a body of individuals is not identical with an association of persons, they have some similarities. An association of persons may consist of non-individuals also but a body of individuals has to consist only of individuals or human beings. The word 'body ' would require an association for some common purpose or for a common cause or there must be unity under some common tie or occupation. A mere collection of individuals without a common tie or common aim cannot be taken to be a body of individuals falling within s. 2(31) of the I.T. Act, 1961 .... Section 47(2) of the I.T. Act, 1961, appears to give a clue to the interpretation of the body of individuals when it contemplates that the body of individuals whether incorporated or no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the same vendor and when each one of the transferees gets absolute title to the property transferred to him there is no joining in the purchase by the transferees. The fact that they may make or put to common use the property purchased by them is a factor which would have no bearing on the purchase itself. Had the sales been effected by four different instruments the case urged by the Revenue may not have arisen. It would make no difference merely because the four sales were covered by one instrument. The transfer in this case was not by the transferors in favour of the four transferees of the entire property and s. 269C could not be applied on this basis. " In CGT v. R. Valsalamma [1971] 82 ITR 828 (SC), the assessee and her sister received under the will of their mother, inter alia, a cinema theatre building with machinery and another building called "police quarters ". Each one of them had a half share in the properties. They gifted these buildings to their brother by means of a Single gift deed and the question was whether the assessee and her sister should be assessed in respect of the gift as individuals or as an association or body of individuals: " Held, (headnote) th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before its accrual and did not reach them and that though the correct status of the promoters was that of a body of individuals, it was not assessable on the interest income as the interest income never reached it as its income. On a reference at the instance of the Revenue, it was held by the Bombay High Court (headnote) : " (i) that the first requirement required to be satisfied before a group of persons could be treated as an association of persons is that they must have joined with a common purpose or in a common action and the second requirement is that the association must have the object of producing income. The promoters owed their status not to any express agreement among themselves, but they became promoters as such by virtue of being nominated by the executive committee which was intended to look after the affairs of the co-operative society. Further, the object of appointing the three persons as promoters was not to carry on any business or earn any income, in the form of interest from the deposits which were made out of the funds collected by way of contribution of share capital of the co-operative society, but they were to function as promoters for the limited purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reserve held by Shankaraiah, the 1st party, though continued to be in his name but held it for the benefit and enjoyment of himself and also for the benefit and enjoyment of parties 2, 3 and 4. Though the share of 0-4-9 is held by Shankaraiah out of the profits that fall to the said share, he will pay 0-1-0 share to each of the parties 2, 3 and 4. In our view, therefore, the vital aspect that emerges out of the above two documents is that on partial partition being effected, there is disruption of the joint family and each of the coparceners is holding his respective share in the assets of the firm separately and so too the profits that flow from out of the said share. If this be the arrangement, the question that arises is whether the share income arising out of 0-4-9 share could be said to be the income of a 'body of individuals' for the purpose of levy and assessment of the tax under the Act. There is no strait jacket formula as to what constitutes a " body of individuals " and any attempt may defy the solution. In the light shed by the case law, the expression 'body of individuals' cannot be said to include a combination of individuals who merely receive income jointly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the above case one Pannalal died and his heirs, his widow and two minor children succeeded to the three businesses wherein no stranger was either a participant or sharer. In fact, for a couple of years the assessee claimed the status of an " association of persons". However, thereafter, it was claimed that the mother and the two minor children should be separately assessed in their " individual " status on their respective one-third share of the income from the businesses since there was partition of the businesses. In this state of affairs, this court held that the three individuals had common interest in the business carried on for the benefit of all of them, though the businesses were not carried on pursuant to a common design but they were carried on by one of them representing all and that, therefore, the three individuals constitute a " body of individuals ". Whereas, herein, Shankaraiah, on partition of the assets of the firm, held Rs. 0-4-9 share in his name, but they are distinct and separate shares held for and on behalf of the other members. There in nothing explicit or implicit to spell out from the two documents that there is a unity of interest and one of them is p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was unnecessary for disposing of the appeal and the fact that that contention had not been considered, would not give rise to a question of law which could be said to arise from the order of the Tribunal. A question of law could be said to arise from an order of the Tribunal when a consideration of that question was necessary for disposing of the appeal before the Tribunal. In CIT v. Burmah-Shell Oil Storage and Distribution Co. of India Ltd. [1978] 115 ITR 891 (Cal), the assessee-company was a distributor of petroleum products including gas for cooking. The gas was supplied to the company by a refinery and the company had purchased many specially made cylinders for the purpose of distributing gas to the customers. The customers returned the cylinders to the company after the gas was exhausted and they were refilled again and supplied to the customers. No revenue expenditure or depreciation on the cylinders was claimed or allowed in the past years' assessments. The company sold the cylinders to the refinery in the accounting year for Rs. 82,19,947 against their original cost of Rs. 1,09,63,754. The refinery continued to supply gas in those very cylinders to the company and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel for the assessee relied on the following decisions: CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589 (SC). In this case the respondent company's steamship which was requisitioned by the Government was lost by enemy action on March 16, 1944. So it received compensation which exceeded the cost price of the steamship and the difference between the cost price and written down value was Rs. 9,26,532. In the assessment of the company for the assessment year 1946-47, the Department sought to charge this amount under the fourth proviso of s. 10(2)(vii) of the Indian I.T. Act, 1922, inserted by the I.T. (Amend.) Act, 1946, which came into force on May 4, 1946. But the company contended that the amount should be deemed to have been received on April 16, 1944, as was done for the purpose of the Excess Profits Tax Act, in which case it could not fall within the accounting period July 1, 1944, to June 30, 1945, relevant to the assessment year 1946-47. The Appellate Tribunal held against the company. On the application of the company the Appellate Tribunal referred the following question of law to the High Court : " Whether, the sum of Rs. 9,26,532, was properly included in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s order not withstanding that it may arise on the findings given by it. A question of law might be a simple one, having its impact at one point, or it may be a complex one, trenching over an area with approaches leading to different points therein. Such a question might involve more than one aspect, requiring to be tackled from different standpoints. All that s. 66(1) requires is that the question of law which is referred to the court for decision and which the court is to decide must be the question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal, and it will be an over-refinement of the position to hold that each aspect of a question is itself distinct question for the purpose of s. 66(1) of the Act. Sometimes the questions are framed in such general terms that, construed literally, they might take in questions which were never in issue. In such cases, the true scope of the reference will have to be ascertained and limited by what appears on the statement of the case. " In Harish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's request the Tribunal included in the same reference the further question whether the Tribunal was right in holding that Rs. 18,950 constituted accumulated profits for the purposes of s. 2(6A)(e). The High Court answered both the questions in favour of the respondent. On appeal, the Supreme Court held (headnote) : " (i) that the accumulated profit for the purposes of s. 2(6A)(e) did not include the current profits for the period ending March 31, 1959; (ii) that the Tribunal was not competent to refer the second question at the instance of the respondent on an application filed by the Department and the reference of that question must be considered to be void. The question raised by the respondent, viz., whether the provision of Rs. 11,000 for tax and Rs. 6,900 for dividend could be taken into account while determining the accumulated profits as at March 31, 1958, was not related to the question raised by the Department, viz., whether accumulated profits could take in current profits. The two questions involved the grant of separate and distinct reliefs and the decision of one did not affect the decision of the other. " On the above conspectus, we are inclined to hold that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... z., that there was a superior title or overriding obligation, inasmuch as it was found that the unit of assessment as a " body of individuals " does not exist in this case. Hence we unhesitatingly hold that this point must be deemed to have been dealt with by the Tribunal and consequently it arises out of its order, which forms part of this reference. Diversion of income by overriding title: After adjudicating the preliminary objection raised by the Revenue, we are now faced with the proposition, whether by agreement dated October 26, 1963, Shankaraiah agreed to hold the share of 24% in the firm in his individual name subject to the obligation that the income corresponding to the share of 6% pertaining to each of his two minor sons shall be paid to them. Before answering, the case-law cited may be adverted to. In Charandas Haridas v. CIT [1960] 39 ITR 202 (SC), C was the karta of a Hindu undivided family consisting of his wife, S, his three minor sons and himself. He was a partner in six managing agency firms and the share of the managing agency commission received by him as such partner was being assessed as the income of the family. On December 31, 1945, C, acting for himsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tnership which prevented the members of a Hindu joint family from dividing any asset. Such division must, of course, be effective so as to bind the members; but Hindu law did not further require that the property must in every case be partitioned by metes and bounds, if separate enjoyment could otherwise be secured according to the shares of the members. For an asset of the kind in this case there was no other mode of partition open to the parties if they wished to retain the property and yet hold it not jointly but in severalty, and the law did not contemplate that a person should do the impossible. The family took the fullest measure possible for dividing the joint interest into separate interests. The document, not being pretence and being genuine, was fully effective between the members and there was partially no Hindu undivided family in respect of those assets. The document effectively divided the income. There was, therefore, no material to justify the finding that the income in the share of the managing agency commission was the income of the Hindu undivided family." In Addl. CIT v. Chandulal C. Shah [1977] 107 ITR 91 (Guj), three brothers, C, N and R, were partners in a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p between the members of the family. If the document of partition is taken to be also an agreement creating a sub-partnership between the members of the family, then the minors who were parties to the document would become full-fledged partners in the so-called sub-partnership, a situation which is patently illegal, because no minor can legally enter into a partnership agreement. In fact, the relevant portion of the document does not speak of any partnership at all. In fact, it had been found that the minors had actually shared the losses. There could be cases where both the elements, namely, (1) sharing of profits, and (2) creation of agency, are in existence with regard to some persons who are parties to the arrangement and yet intention to create partnership is found to be lacking because of the fact that the remaining persons are not legally capable of entering into a partnership agreement. The present is such case. " In CWT v. J.K.K. Angappa Chettiar [1979] 116 ITR 456 (Mad) as result of a partition on March 31, 1961, between the assessee and his two minor sons, the capital account of the HUF, of which the assessee was the karta, in various partnership firms was equally divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fundamental principle of the law of partnership that the relation of partnership arises from contract and not from status. It was held further (headnote): "It is clear in law that as a consequence of partition between the members of an HUF, each member of the HUF gets the share in his own right. The assessee who was the karta of HUF consisting of himself, his wife and three sons, became a partner in a firm having 1/4th share in his capacity as karta. On November 15, 1965, there was a partial partition in the family as a result of which the 1/4th share in the firm was divided equally between the five members of the family, each taking an 1/5th share. A memorandum of partition was drawn up on November 8,1966, according to which the capital standing to the credit of the family in the books of the firm was also divided into five shares and thenceforward the amounts which fell to the shares of the four members other than the assessee were treated as loans from them. " Conclusion : just as the fact of a karta becoming a partner did not introduce the members of the undivided family into the partnership, the division of the family did not change the position of the partner vis-a-vis t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persons may consist of non-individuals but a body of individuals has to consist only of individuals or human beings. A mere collection of individuals without a common tie or common aim, cannot be taken to be a " body of individuals ". (2) In our undoubted view Shankaraiah will be holding the income received by him as a constructive trustee under ss. 81, 90 and 94 of the Indian Trusts Act, in favour of the two minors for whose benefit he holds it. Looking from this angle also, it cannot be held that Shankaraiah and the two minors constitute a " body of individuals ". (3) We are inclined to hold that when a question is raised before the Tribunal, and is either dealt with or failed to be dealt with, or considered but abandoned as unnecessary-must be deemed to have been dealt with by it, and is, therefore, one arising out of its order. Secondly, where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal. It is, therefore, manifest that the aspect of " diversion of income by overriding title " can be canvassed by the assessee before thi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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