Commissioner of Income Tax, Bombay vs Smt. Indira Balkrishna
Rewritten Version Notice: This is a rewritten version of the original judgment.
Court: Supreme Court of India
Case Number: Civil Appeals Nos. 249 and 250 of 1958
Decision Date: 14 April 1960
Coram: S.K. Das, J.L. Kapur, M. Hidayatullah
In this matter the Commissioner of Income‑Tax, Bombay filed a petition against Smt. Indira Balkrishna, and the case was decided on 14 April 1960 by a bench of the Supreme Court of India consisting of Justice S.K. Das, Justice J.L. Kapur and Justice M. Hidayatullah. The official record lists the petitioner as the Commissioner of Income‑Tax, Bombay and the respondent as Smt. Indira Balkrishna. The judgment is reported in the 1960 volume of the All India Reporter at page 1172 and in the 1960 Supreme Court Reports (Third Series) at page 513, and it has subsequently been cited in various later authorities, including reports from 1961, 1965, 1968, 1970, 1973, 1977 and others. The statutory provision that formed the core of the dispute was Section 3 of the Indian Income‑Tax Act, 1922 (XI of 1922), which defines the term “association of persons”. The headnote of the decision summarizes the factual backdrop: a Hindu man who followed the Mitakshara school of Hindu law died, leaving three widows as his legal heirs. The widows held the estate together as joint tenants and did not assert a right to separate possession or enjoyment of the property. The principal sources of income from the estate were dividends and income derived from immovable property, the latter being excluded from assessment as income of an association of persons under Section 9(3) of the Income‑Tax Act. The legal issue presented to the Court was whether the three widows could be treated as an association of persons for the purpose of assessing the remainder of the income.
The Court held that the three widows did not fall within the meaning of “association of persons” as articulated in Section 3. It explained that an association of persons is a group in which two or more individuals join together for a common purpose or common action, and for tax purposes one of the objects of such a group must be the production of income, profits or gains. The Court emphasized that the group must be formed to promote a joint enterprise that generates income. In the present case, the widows merely received dividends and interest jointly and performed no activity that contributed to the generation of that income. Accordingly, they could not be classified as an association of persons. The Court supported this conclusion by referring to earlier decisions, namely B.N. Elias v. Commissioner of Income‑Tax, Bombay (1935 3 ITR 408), Commissioner of Income‑Tax, Bombay v. Laxmidas Devidas (1937 5 ITR 484) and Re Dwayakanath Harishchandra (1937 5 ITR 716), all of which had approved a similar interpretation of the statute.
The judgment was delivered under the civil appellate jurisdiction for Appeals Nos. 249 and 250 of 1958, which were entertained by special leave from the Bombay High Court’s order dated 7 March 1956 in Income‑Tax Appeals Nos. 52 and 53 of 1955. Counsel for the appellant and counsel for the respondent were instructed, though their names are not reproduced here. The Court noted that the two appeals were heard together because they arose from identical facts and raised the same question of law. For the factual matrix, the Court recounted that Balkrishna Purushottam Purani died on 11 November 1947, leaving behind three widows—Indira, Ramluxmi and Prabhuluxmi—and two daughters. The widows, as legal heirs, inherited the estate of the deceased, which formed the basis of the income‑tax proceedings.
In this case the estate of the deceased comprised immovable property situated in Ahmedabad, shares in joint‑stock companies, bank deposits and a share in a registered firm. For the two assessment years 1950‑51 and 1951‑52, which corresponded to Sambat years 2005 and 2006, the Income‑Tax Officer issued notices to the legal heirs of Balkrishna Purushottam Purani. In response to those notices returns were filed; one return was filed under the heading “Legal heirs of Balkrishna Purushottam Purani” and the other in the name of “the estate of Balkrishna”. In the first return the status of the assessee was recorded as “individual”, whereas in the second return it was recorded as “association of persons”. Both returns were signed by Indira, who was one of the three widows of the deceased. For the assessment year 1950‑51 the total income shown in the return was Rs 69,346, consisting of Rs 11,011 from property, Rs 4,071 as share of the registered firm, Rs 51,796 in dividends, Rs 22,343 as interest, and Rs 125 as ground rent. For the assessment year 1951‑52 the total income shown was Rs 92,426, comprising Rs 10,879 from property, Rs 460 as share of the registered firm, Rs 80,426 in dividends, Rs 536 as interest on deposits and Rs 125 as ground rent. The Income‑Tax Officer treated the assessee in both years as an “association of persons” and accordingly made two assessment orders on that basis. An appeal was then made to the Appellate Assistant Commissioner, wherein two points were raised: first, that the three widows should have been assessed individually rather than as an association of persons; and second, that, irrespective of the first point, the income from property ought to have been assessed separately in the hands of the three widows pursuant to the provisions of section 9(3) of the Income‑Tax Act, 1922. The Appellate Assistant Commissioner dismissed the first argument but accepted the second. The matter was subsequently taken to the Income‑Tax Appellate Tribunal, Bombay. The Tribunal held that the entire estate of the deceased was held by the three widows as joint tenants and that its income was properly assessable in their hands in the status of an association of persons. The Tribunal further found that the Appellate Assistant Commissioner was incorrect in concluding that the shares of the three widows were definite and determinable and that section 9(3) applied. The assessee then moved the Tribunal to refer certain questions of law arising from its orders to the High Court of Bombay. The Tribunal referred four questions, of which the present discussion concerns question 3, which asked whether, on the facts and circumstances of the case, the Tribunal was right in holding that the assessment made on the three widows in the status of an association of persons was legal and valid in law. Two references were made by the High Court to the orders passed for the two assessment years, which gave rise to Income‑Tax References Nos 52 and 53 of 1955.
In the two Income‑tax References numbered 52 and 53 of 1955, the principal judgment was delivered in Reference 52 of 1955. The High Court of Bombay held that the Tribunal had erred in concluding that the three widows could be taxed in the capacity of an “association of persons” with respect to the income they derived as heirs of their deceased husband. Consequently, the Court answered question No. 3 in the negative. Following that decision, the department, represented by the Commissioner of Income‑Tax, Bombay, applied to this Court for special leave to appeal against the judgments and orders of the Bombay High Court in both references. Special leave was granted, and the two appeals were filed in accordance with that permission. In these appeals, the Commissioner of Income‑Tax, Bombay, appears as the appellant and the assessed taxpayer, the widow concerned, is the respondent. The appellant’s counsel argued that the High Court had been wrong when it stated that liability of an association of persons to tax does not arise merely because the persons receive income, but only when they earn or help to earn the income by reason of their association; the counsel further submitted that if the Department’s case stops at mere receipt of income, the Department fails to establish tax liability on the basis of an association of persons. It was also submitted that the passage quoted from the High Court did not set out the correct test for determining what constitutes an “association of persons” under the Income‑Tax Act.
Before examining the appellant’s argument further, it was necessary to clarify the legal position of co‑widows under the Mitakshara law of succession and to recall the Tribunal’s findings. The law regarding co‑widows is settled: they succeed as co‑heirs to the estate of their deceased husband and hold the estate as joint tenants with rights of survivorship and equal beneficial enjoyment, which means that between themselves they are entitled to an equal share of the income. Although they are joint tenants, none of the co‑widows may demand an absolute partition of the whole estate against the others, because such a partition would destroy their survivorship rights. Nevertheless, they may obtain a partition of separate portions of the property so that each widow can enjoy her one‑third share of the income generated by those portions. The Tribunal observed that, in the present case, the widows had not exercised the right to separate possession and enjoyment. Instead, they chose to manage the property jointly, each acting for herself and for the others, and they received the income of the property in equal shares, which they were each entitled to enjoy. The appellant’s counsel emphasized this finding of joint management and contended that, on the basis of that finding, the widows satisfied even the test articulated by the High Court and therefore should be treated as an “association of persons” for tax purposes.
For the purpose of taxation, the Court observed that the High Court had correctly noted that the only property which the widows could have administered together was the immovable property that generated an income of approximately Rs 11,000. Regarding that immovable property, the Appellate Assistant Commissioner had held that subsection 9(3) of the Act was applicable. No appeal had been filed by the Department against this finding, and consequently the Tribunal was not authorised to review or overturn it. The Court further held that, even on the merits, the Tribunal was erroneous in concluding that the individual shares of the widows were not definite and ascertainable. In fact, the widows each possessed an equal one‑third share of the income, and the provisions of subsection 9(3) clearly applied to the immovable property. Concerning the shares, dividends and interest on deposits, the Tribunal had found no evidence of any act of joint management. The principal component of the income consisted of dividends, and it was difficult to identify any managerial act by the widows that could have produced or assisted in producing that income. On the contrary, the material filed by the assessee included lists of shares, reproduced as annexure C, which demonstrated that the shares were held separately in the name of each of the three widows; this fact was not contested by the Department.
The Court then turned to the central issue of the appeal, namely what constitutes an “association of persons” within the meaning of the Income‑Tax Act. It was reiterated that the Act contains no definition of the term, although section 3 characterises an association of persons as an entity or unit of assessment. Prior to 1924, section 3 listed “individual, company, firm and Hindu undivided family.” The Indian Income‑Tax Amendment Act of 1924 (Act XI of 1924) replaced those words with “individual, Hindu undivided family, company, firm and other association of individuals.” Subsequent amendment by the Income‑Tax Amendment Act of 1939 (Act VII of 1939) revised the provision further, stating that, where any Central Legislature enactment imposes income tax for a year at any rate, such tax shall be levied in accordance with the Act on the total income of the previous year of every individual, Hindu undivided family, company, local authority, and of every firm and other association of persons, or the partners of the firm or members of the association individually. The same 1939 amendment also introduced subsection 9(3). Accordingly, section 3 now imposes tax “in respect of the total income … of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or members of the association.”
In the absence of any statutory definition of the term “association of persons,” the Court was required to interpret the expression according to its plain and ordinary meaning. It was also necessary to keep in mind that the expression appears in a provision that imposes a tax on the total income of each unit of assessment listed in the section, and that list expressly includes an “association of persons.” Consequently, the meaning assigned to the words must be influenced by the surrounding context of that provision. Several decisions were cited by counsel that addressed this issue, and the Court was made aware of a dispute concerning whether the phrase “association of individuals,” which earlier appeared in the same section, should be read ejusdem generis with the word that immediately precedes it, namely “firm,” or whether it should be read ejusdem generis with all the other categories of persons named in the section. The Court considered that it was unnecessary to enter into that controversy for the purposes of the present case. Likewise, the Court did not feel the need to examine the markedly different characteristics of the three other categories mentioned in the section—namely Hindu undivided families, companies and firms—and to decide whether, in view of the amendments made in 1939, the words in question could be read ejusdem generis with either Hindu undivided families or companies. For the matter at hand, the Court limited its analysis to three authorities: In re B. N. Elias and Others, the Commissioner of Income‑Tax, Bombay v. Laxmidas Devidas and Another, and In re Dwarakanath Harishchandra Pitale and Another. In the first of these cases, Justice Derbyshire observed that the Oxford Dictionary defines “associate” as “to join in common purpose, or to join in an action.” From this definition, the Court concluded that an association of persons must be a group in which two or more individuals come together for a common purpose or common action. Because the provision under consideration imposes a tax on income, the Court held that the association must have the object of generating income, profits or gains. This view was endorsed by Justice Beaumont in the Laxmidas Devidas case, where he articulated the same principle at page 589, and it was also supported in the Pitale case. Justice Costello, speaking in the Elias case, expressed the test in even stronger terms, stating that the legislature likely intended to capture combinations of individuals who were engaged together in a joint enterprise even though they did not constitute a partnership under the law. He added that once a combination of persons is found to be formed for the promotion of a joint enterprise, there is no difficulty in treating those persons as an “association.” The Court affirmed that these cited decisions correctly articulate the essential test for determining what constitutes an “association of persons” within the meaning of section 3 of the Income‑Tax Act.
The Court observed that the principles articulated in earlier authorities have been accepted and applied by a variety of High Courts in numerous subsequent decisions, and that it is unnecessary to enumerate each of those decisions. Nevertheless, the Court felt it necessary to caution that there is no single formula that can be universally applied to determine the precise facts, the number of facts, or the nature of facts required to conclude that an association of persons exists within the meaning of section three of the Income‑Tax Act. The determination must be made on the basis of the specific facts and circumstances of each individual case. Learned counsel for the appellant advanced the view that, in light of sections three and four of the Indian Income‑Tax Act, the essential test is whether there is a common source of income in which two or more persons have an interest, whether as owners or in some other capacity, and that it is irrelevant whether the persons’ shares are expressly defined or whether any scheme of management is in place. He further submitted that if the interested persons enter into an express or tacit arrangement to divide the income at a point before it is generated from the source, the association ceases to exist; otherwise, the association persists. The Court noted the cited authorities, namely (1) [1937] 5 I.T.R. 484, (2) [1937] 5 I.T.R. 716 and (3) [1935] 3 I.T.R. 408. While acknowledging the earlier discussion of the crucial test for identifying an association of persons under section three, the Court held that the test proposed by the appellant’s counsel is neither conclusive nor determinative of the matter before it.
Turning to the factual findings recorded by the Tribunal, the Court found that there was no determination that the three widows had combined in a joint enterprise for the purpose of generating income. The Tribunal’s only finding was that the widows had not exercised any right to separate enjoyment of the income, and apart from receiving dividends and interest jointly, they had undertaken no action that contributed to the production of income from the shares and deposits in question. Based on these findings, the Court concluded that the three widows could not be said to possess the status of an association of persons as defined by section three of the Indian Income‑Tax Act. Accordingly, the Court affirmed the High Court’s negative answer to question number three. As a result, the appeals were dismissed with costs, with a single set of hearing fees to be paid for both appeals. The appeals were therefore dismissed.