ORDER
George Cheriyan, Vice-President
1.This appeal is by the revenue. This appeal relates to the assessment year 1980-81. The assessee is a registered firm. The previous year is from October, 1978 to 20-10-1979.
2. One Sri Chandmal Chunilal was a partner in the assessee-firm till he passed away on 7-5-1977. Thereafter we gathered at the hearing that the firm was reconstituted. It was not a case of dis solution of the firm and succession thereto by another firm. In the reconstituted firm Smt. Dhako Bai, wife of late Chandmal Chunilal, became a partner along with three sons S/Shri Rakeshchand, Kevalchand and Kiranraj. The amount standing to the credit of late Chandmal Chunilal, who was assessed as an indivi-dual, was credited in an account in the firm under the style ‘estate of late Chandmal Chunilal’. Sri Chandmal Chunilal left behind a married daughter Smt. Saroj, who did not join the reconstituted firm. To the account styled ‘estate of late Chandmal Chunilal’ interest was credited, A question arose as to whether four-fifth of the interest so credited (i.e., excluding what would have been the share of Smt. Saroj) required to be added in the hands of the firm by virtue of Section 40(b) of the IT Act, 1961.
3. The contention of the assessee was that the provisions of Section 40(b) would be applicable only when payments were made to partners directly and not to an Association of Persons (AOP), even if some of the partners happened to be the members of the said association. The ITO took the view that in respect of the estate left behind by Sri Chandmal Chunilal, there was no assessable entity of AOP. The ITO referred to Section 8 of the Hindu Succession Act, 1958 and stated that what were received on the demise of Sri Chandmal Chunilal by the heirs were their separate property. The ITO also examined the issue whether the heirs would constitute a ‘body of individuals’ and after referring to the case law on the point, he held that they did not also constitute a body of individuals and the income from interest in the accounts styled ‘estate of late Chandmal Chunilal’ could not be construed to be that of a body of individuals. He eventually brought to tax four-fifth of the interest credited which came to Rs, 13,128 by applying the provisions of Section 40(b).
4. The asaessee appealed. The CIT(A) deleted the amount added stating as under:-
Late Shri Chandmal left behind his widow, three sons and a daughter. Among them, only the sons and their mother were partners of the firm. The deceased did not execute a will in his lifetime. In terms of the Hindu Law, the widow as well as his children including the married daughter became legal heirs. Apart from the money deposited with the firm, late Chandmal had an immovable property. It is gathered that the legal heirs did not see eye to eye with each other on the distribution of the estate of Shri Chandmal and cases have been filed in the Court to settle their interest inter se. That is the reason why the amount left behind as capital in the firm had remained undistributed over the legal heirs. In short, the amount did not belong to the legal heirs till a distribution had taken place. Till then it belonged to an estate. The amount of interest paid by the firm was not to the partners. It was paid to the estate which consisted of not only the partners but the daughter of the deceased also. In this view therefore I hold that Section 40(b) of the Act cannot apply. The appellant would succeed and get the inclusion of Rs. 13,128 deleted.
The revenue is in appeal before us.
5. The submission of the learned departmental representative was that the property left behind by Shri Chandmal Chunilal was his individual property. Immediately on his demise, in terms of Section 8 of the Hindu Succession Act, 1958 read with Section 19, each of the heirs had a definite share in the property and merely because the property was left undivided, the income credited to the account could not be held to be income, which fell to the five persons, who were heirs jointly. Each of the heirs had a definite share and since four of the heirs were partners in the firm, in respect of their share of interest in terms of the provisions of Section 40(b), the interest income had to be disallowed.
6. The learned counsel for the assessee submitted that there were differences of opinion between the heirs after the demise of late Shri Chandmal Chunilal. It was consequent to this that the property could not be divided and was kept as one unit. He submitted that the income of the unit had to be considered as a whole. There was no question of payment to any individual heir. Only the individual heirs and that also four out of five such heirs were partners in the firm. Since the payments were not to individual heirs, the provisions of Section 40(b) could not be invoked. The payment, he submitted, was to a pool of persons. The learned counsel went on to state that no interest was credited specifically to the account of any partner. Credit to a joint account could never be construed to be a credit to a partner. For all these reasons lie pleaded for the upholding of the deletion made by the CIT(A).
7. We have considered the rival submissions of the parties. In the Chapter on ‘Intestate Succession’, the following appears at page 921 of Hindu Law – Mulla, 15th edition (1982) :-
Inheritance never in abeyance :-One governing principle of Hindu Law is that inheritance can never be in abeyance. On the death of a Hindu the person who is then “his nearest heir or persons who are then his nearest heirs and as such succeed simultaneously to his property, become entitled at once to the property left by him. The right of succession vests in such heir or heirs immediately on the death of the owner of the property.
The same principle underlies the provisions of this Act.
From the aforesaid it is clear that on the demise of Shri Chandmal Chunilal, the heirs became entitled at once to the property left by him. The fact that due to differences of opinion, the property could not be divided, does not delay vesting since Shri Chandmal Chunilal passed away intestate. Under the provisions of Section 8 of the Hindu Succession Act, the property of a male Hindu dying intestate is to devolve firstly upon heirs being relatives specified in class 1 of the schedule. All the heirs in the present case are class 1 heirs. Section 9 of the aforesaid Act states that among the heirs specified in the Schedule, those in class 1 shall take simultaneously and to the exclusion of all other heirs. According to Section 10 of the aforesaid Act, among the class I heirs, the widow takes one share, surviving sons and daughters each take one share. Therefore, in the present case, each of the heirs referred to takes one share, viz., each has 1/5th share. Section 19 states that where two or more heirs succeed together to a property left intestate, save as otherwise provided in the Act, they take per capita and secondly as tenants-in-common and not as joint tenants. On the point of the scope of the expression ‘tenants-in-common’ the following appears in the text book on Hindu Law already referred to at page 1026 :-
Tenants in common – Heirs who succeed together to the property of an intestate as envisaged in this section and the earlier relevant provisions of the Act are obviously entitled to all the rights and subject to all obligations of persons who are tenants-in-common. In a tenancy in common each sharer has an independent share in the common property and ordinarily cannot act for the others or assume the authority of a manager unless so appointed by all the others. Thus for instance one of several female heirs who are co-tenants cannot alienate the property held as co-tenants though, of course, in a given case the Court may as far as possible try to protect the interest of the alienee on equitable considerations. A co-owner, as such, it has been held in the context of the present section, has no authority to enlarge the period of limitation as against the other co-owners, by any acknowledgement of liability or payment of interest or principal.
It is, therefore, clear that each of the heirs has succeeded to a 1/5th share of the assets of late Shri Chandmal Chunilal. The learned counsel had made the point that because there was no family arrangement entered into it could not be said that even-tually any portion of the capital amount would come to the present partners. It may be that such amount would go to a person who was not a partner and some other properties would come to the partners. When the distribution is made finally, this may be the result. But till such time a family arrangement is arrived at, in all the properties all the heirs have equal shares and the heirs have an equal share in the balance referred to in the account styled “estate of late Shri Chandmal Chunilal”. The heirs do not con-stitute an AOP, because there is no voluntary coming together to share the profits by agreement. As a matter of fact it is stated that there were differences of opinion.
8. The only point is whether the heirs constituted a body of individuals. We have the ratio of the judgment of the Madras High Court in the case of N.P. Saraswathi Ammal v. CIT [1982] 138 ITR 19 in the light of which we have to examine this aspect. The Madras High Court had observed as under at page 26 :
It is not our intention to lay down what we mean by a BOI and lay it down in an authoritative or definitive fashion. Parliament has not attempted a definition. And, if we may adopt a saying of Lord Reid, judges should not rush in where the Legislature has feared to tread. All we have attempted here is to mark the distinction between an AOP and a BOI, by reference to certain broad features of each. It is needless to say that it would be a matter for the IT authorities as well as the Tribunal and the Courts to consider the facts in each case to find out if any given group of people are to be regarded as a BOI or not. The individuals concerned may have something or other in common which brings them together with reference to an income or its source. It may be common intention ; it may be a common activity ; it may be a sharing of common spoils. This list is not exhaustive. Nor is it necessary that all these characteristics must be present in every case. Much might depend on the relations inter se between the individuals concerned and their relationship in the gross to the income or to the income yielding asset in question.
To turn to the facts of the present case. Here is a family group of a widow and four sons. They are by no means a motley crowd. Nor are they an ad hoc or random lot finding themselves together by sheer accident. They are, on the contrary, a family group, knit by family ties. At the inception, they were united in a common grief. The bequest of the business to all of them in common under the testator’s will only tended to make their family tie-up into more of an economic group or body than it would otherwise have been. What is more, the object which united them economically was not just an investment in property but a live business undertaking. Business, as a species of property, differs from other subjects of ownership in that it is not static, but involves a constant flow of transactions upon transactions every day, subject to risks and vicissitudes unlike in other kinds of property and requiring overt acts of management by those who wish to profit by it. There is no evidence on record in this case that the widow was at any time aided by any of her sons even after they had attained majority, one by one. But they always had the choice of demanding their share, which if conceded, would have resulted either in the disruption of the business or in its disposal. Nothing of this kind, however, happened in this group. That the integrity of the business continued with not one of them wishing to take his or her share and depart seems to us to be itself a clear indication that mother and children who had fallen in line at the death of Perianna Pillai were still keeping in step and minded to keep in step, as a BOI. One might easily play up the blood rela-tionship between these individuals in order to rule out any volun-tary association between them. But the absence of an agreement or arrangement between them would only make them into some-thing less than an AOP. The point, however, is whether that would make them into something less than a BOI, assessable as a unit ? The answer is quite clear to our minds. We are satisfied that the assesseea (legatees) in this case have got to be treated as a BOI, in spite of, or, perhaps, because of, the accident of a family relation-ship between them and the accident of a test a mentary disposition in their favour particularly since they continued that relationship even though they had a choice of putting an end to it.
In the present case, the balance is kept intact not because the heirs decided that it should be kept intact. It was kept intact because a family arrangement could not be arrived at since there were differences of opinion. The High Court has pointed out that much might depend on the relations inter se between the individuals concerned. If we look at the relations inter se from what has been stated it is clear that there was no agreement as to how the assets were to be divided, etc. Therefore, the group did not constitute a body of individuals. Since they did not also constitute an Association of Persons or a body of Individuals, each person had a definite 1/5th share in the assets and as such, they should be construed to have a 1/5th share in the interest credited. To the extent that any of them was a partner, 1/5th share to which each such person was entitled would be interest payable to a partner by the firm. Therefore, it would be interest received by a partner in terms of Section 40(b]). The add back of 4/5th of the entire interest, as made by the ITO, is therefore in order. We would accordingly set aside the finding of the CIT(A) and restore the addition as made by the ITO.
9. In the result, the appeal of the revenue is allowed.