1973 (2) TMI 1 - SC - Income Tax

Members can withdraw from income-producing associations without formal procedures, ending association status for tax assessment

The SC held that an association of persons (AOP) requires voluntary combination of members for income production purposes. Where parties filed returns as ... Status of an Association of persons (AOP) Or individuals - shares purchased jointly - income comprised dividends from shares and income from house property - HELD THAT:- For forming an 'association of persons', the members of the association must join together for the purpose of producing an income. An 'association of persons' can be formed only when two or more individuals voluntarily combine together for a certain purpose. Hence volition on the part of the members of the association is an essential ingredient. It is true that even a minor can join an 'association of persons' if his lawful guardian gives his consent. In the case of receiving dividends from shares, where there is no question of any management, it is difficult to draw an inference that two or more shareholders function as an 'association of persons' from the mere fact that they jointly own one or more shares, and jointly receive the dividends declared. Those circumstances do not by themselves go to show that they acted as an 'association of persons'. But unfortunately for the assessee for the assessment years 1957-58 and 1958-59, they themselves had submitted their returns in the status of 'association of persons'. Those returns were neither withdrawn nor did they file fresh returns as 'individuals'. It was for the first time in the appeal, it was argued on their behalf, that they should not have been assessed as 'association of persons'. The question whether the assessees functioned as an 'association of persons' during those years was best known to them. Their admission in that regard in an important piece of evidence. They have made no attempt to show that the said admission was made under erroneous impression of law or is otherwise vitiated. Hence for those years they were rightly assessed as an 'association of persons'. But, so far as the other assessment years are conned, the same result does not follow. They themselves have specifically stated that they are no more functioning as 'association of persons'. In the case of 'association of persons' it is always open to its members to withdraw from the same. No one can be compelled to continue as a member of an association. For withdrawing from an association no particular form need be observed. As seen earlier, herein we are concerned only with the realisation of dividends. If the individual members of the association choose to realise their dividends as individuals, there is an end of the association. The assessee's assertion that they have realised their dividends in their individual capacity remains unrebutted. There is nothing to disprove that claim. None of the facts proved can be said to be inconsistent with the claim made by them. Thus, we are unable to agree with the High Court that during the assessment years 1959-60 to 1962-63, the assessees should be held as having functioned as an 'association of persons'. In the result, We answer the question in the negative and in favour of the assessee. The Supreme Court heard connected appeals challenging the decision of the High Court of Madras regarding the assessment of the assessees under the Indian Income-tax Act, 1922. The core legal question was whether the assessees should be assessed as an 'association of persons' or as 'individuals' for the relevant assessment years (1957-58 to 1962-63).The Court divided the assessment years into two groups based on the assessees' filing status. For the years 1957-58 and 1958-59, the assessees submitted their returns as an 'association of persons,' while for later years, they claimed to be assessed as 'individuals.' The dispute centered on the treatment of dividend income from shares, as the income from house property was already decided in favor of the assessees.The facts revealed that the shares were jointly purchased in the name of 'G. Murugesan & Brothers,' with transfer applications signed by the guardian of the minor beneficiaries. The dividends were collected jointly until Murugesan came of age, after which he managed the shares individually. The assessees' income and expenses were accounted for separately, with a partition excluding the gifted property and shares.The Income-tax Officer and the Appellate Assistant Commissioner assessed the assessees as an 'association of persons,' but the Appellate Tribunal ruled in favor of individual assessment. The High Court sided with the revenue, considering the joint actions of the assessees in acquiring and managing the shares as indicative of an 'association of persons.'The Court delved into the concept of an 'association of persons,' emphasizing that the members must join for the purpose of producing income. It noted that mere joint ownership and receipt of dividends do not necessarily establish an association unless there is evidence of joint management for income generation.The Court highlighted the significance of the assessees' own admission of their status as an 'association of persons' for the initial assessment years, which remained unchallenged. However, for the subsequent years, where the assessees claimed individual status, the Court found no evidence contradicting their assertion of managing dividends individually.The Court distinguished a Bombay High Court case cited by the revenue, emphasizing the specific circumstances of the present case. It also rejected the revenue's reliance on another decision, affirming the principles established in earlier judgments.Ultimately, the Court dismissed some appeals and allowed others, holding that the assessees should not be considered an 'association of persons' for the years 1959-60 to 1962-63. The High Court's decision was overturned in favor of the assessees, with costs awarded in their favor.In conclusion, the Supreme Court's judgment clarified the criteria for determining an 'association of persons' for income tax assessment purposes, emphasizing the voluntary joint purpose of income generation as a key factor. The Court's decision was based on a thorough analysis of the facts and legal precedents, ultimately ruling in favor of individual assessment for the relevant years.