PETITIONER: M. M. IPOH & ORS. Vs. RESPONDENT: COMMISSIONER OF INCOME-TAX, MADRAS DATE OF JUDGMENT: 26/07/1967 BENCH: SHAH, J.C. BENCH: SHAH, J.C. SIKRI, S.M. RAMASWAMI, V. CITATION: 1968 AIR 317 1968 SCR (1) 65 CITATOR INFO : R 1970 SC1589 (10) ACT: Income-tax Act, 1922, s. 3--Whether violative of Art. 14 of the Constitution--Quasi-Judicial function of Income-tax Officer in assessing income to tax and duty to prevent evasion--If constitute sufficient guidance--Individuals minor and firm trading together--Whether association of persons--Whether doctrine of res judicata applies to finding in assessment proceedings in one year in relation to proceeding for another year--Whether determination and declaration necessary as to who is principal officer of an association of persons before assessment proceedings take place. HEADNOTE: The Karta of a Hindu undivided family was assessed to Incometax from year to year until the assessment year 1953- 54 either as an individual or as the Karta. But later, the Income-Tax Officer issued notices to him under s. 34(1) of the Income-tax Act, 1922, for the assessment years 1951-52 to 1953-54 and under s. 22(2) for the years 1954-55 to 1956-57 for assessment of the income as having been received by an association of persons consisting of the Karta and his minor son in 1951-52, and the Karta, his minor son and a firm in the years 1952-53 to 1956-57, and assessed the income received as income and associations of persons. The Appellate Assistant Commissioner and the Tribunal, in appeals filed before them, substantially confirmed the order of the Income-tax Officer. The High Court, upon a reference. held that the income for the assessment year 1951-52 did E not accrue to an association of persons, but confirmed the view taken by the Income-tax Officer in respect of the income for the year- 1952-53 to 1956-57. The Karta then moved the High Court under Art. 226 of the Constitution and contended that s. 3 of the Income-tax Act, 1922, invested the Income-tax Officer with arbitrary and unguided power to assess the income of an association of persons in the hands either of the association or of the persons constituting that association and it therefore offended Art. 14 of the Constitution. The High Court rejected the petitions. In appeals to this Court against the decisions of the High Court in the writ petition and the reference under s. 66 of the Income tax Act. HELD:(i) S. 3 of the Income-tax Act, 1922, was not violative of Art. 14 of the Constitution. The duty of the Income-tax Officer is to administer the provisions of the Act in the interests of public revenue, and to prevent evasion or escapement of tax legitimately ,due to the State. Though an executive Officer engaged in the administration of the Act. the function of the Income-tax Officer is fundamentally quasi-judicial. His decision to bring to tax either the income of the association collectively or the shares of the members of the association separately is not final: it is subject to appeal to the Appellate Assistant Commissioner and to the Tribunal. The nature of the authority exercised by the Income-tax Officer in a proceeding to assess to tax income, and his duty to prevent evasion or escapement of liability to pay tax legitimately due to the State, con- stitute adequate enuciation of Principles and policy for the guidance of the Income-tax Officer. [72B-H] 66 Suraj Mall Mohta & Co. v. A. V. Visvanatha Sastri and Anr. (1954) 26 I.T.R. 1, distinguished. Shri Ram Krishna Dalmia v. Shri Justice S.R. Tendolkar and Ors. [1959] S.C.R. 279, Jyoti Pershad v. The Administrator for the Union Territory of Delhi. [1962] 2 S.C.R. 125 and Commissioner of Income-tax U.P. v. Kanpur Coal Syndicate, (1964) 53 I.T.R. 225. referred to, There is no force in the contention that s. 23A of the Income-tax Act, as it was incorporated by Act 21 of 1930 laid down certain principles for the guidance of the Income Tax Officer in exercising his option, but since the-repeal of that section by Act 7 of 1939, the discretion vested in the Income-tax Officer to select either the income of the association or the individual member is unfettered. By the repeal of s. 23A(1) the essential nature of the power of the Incometax Officer was not altered. He remained as before under a duty to administer the Act, for the benefit of public revenue, but his powers were to be exercised judicially and so as to avoid double taxation of the same income. [73A-B; 74F-G] (ii) There was abundant material on the record to prove that the Karta, his minor son and the firm formed an association in the years 1952-53 to 1956-57. Under s. 2(9) of the Income-tax Act, 1922, read with el. (42) of 3 of the General Clauses Act, a firm is a person within the meaning of the Income-tax Act and a firm and an individual or group of individuals may form an association of persons within the meaning of s. 3 of the Income-tax Act. [75F, G] There is nothing in the Act to indicate that a minor cannot become a member of an association of persons for the purposes of the Act. In any event the High Court had rightly held that the mother and guardian of the minor son must, on the facts, be deemed to have given her implied consent to the participation of the minor in the association of persons. [75H] Commissioner of Income-tax, Bombay v. Laxmidas & Anr. (1937) I.T.R., 584 and Commissioner of Income-tax, Bombay North, Kutch Saurashtra v. Indira Balkrishna, (1960) 39 I.T.R. 546, referred to. (iii)The doctrine of res judicata does not apply so as to make a decision on a question of fact or law in a proceeding for assessment in one year binding in another year. The assessment and the facts found are conclusive only in the year of assessment: the finding on questions of fact may be good and cogent evidence in subsequent years, when the same question falls to be determined in another year but they are not binding and conclusive. The finding recorded by the High Court that in the year 1951-52 there was no association of persons constituted by the Karta and his minor son did not in 'the present case have any effect on the finding of the Tribunal that in year 1952-53 and the subsequent years such an association existed. Furthermore, the association of persons which traded in 1952-53 and the subsequent years was different from the association in 1951- 52 because in 1952 an association was formed of the Karta, his son and a firm. [75B-C] (iv)If the person described as a principal officer of an. association is duly served with a notice under s. 23(2) in the manner prescribed by s. 23(2), an adjudication of his status as the principal officer, before assessment proceedings may take place, is not obligatory. The order assessing the association containing a finding that the per. son served is the principal officer is sufficient compliance with the 67 requirements of the statute. It is open to the association to challenge the finding of the Income-tax Officer in appeal before the Appellate Assistant Commissioner and in further appeal to the Appellate Tribunal. But the order declaring him as the principal officer of an association of persons will not be deemed to be void merely because the proceeding for assessment was not preceded by a declaration of his status as the principal officer. [80G-81B] Commissioner of Income-tax, Punjab & N.W.F.P. v. Nawal Kishore Kharaiti Lal, (1938) 6 I.T.R. 61, referred to. JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 1060- 1064
of 1965.
Appeals by special leave from the judgment and order dated
April 3. 1961 of the Madras High Court in Tax Case No. 201
of 1960.
AND
Civil Appeals Nos. 1103-1107 of 1966.
Appeals by special leave from the judgment and order dated
November 29, 1963 of the Madras High Court in Writ Petitions
Nos. 1374-1378 of 1961.
M. M. Nambiyar, K. Narayanaswami, B. Manivannan, B.
Parthasarathy, J. B. Dadachanji, O.C. Mathur and Ravinder
Narain, for the appellants (in all the appeals).
S. T. Desai, R. Ganapathy Iyer and R. N. Sachthey, for the
respondent (in all the appeals) and for the Attorney-General
for India (in C. As. Nos. 1103-1107 of 1966).
The Judgment of the Court was delivered by
Shah, J.-Meyyappa (1), Alagammal his wife, and Chokalingam
and Meyyappa (11) his two minor sons formed in 1940 a Hindu
Undivided Family which traded in the name of “M.S. M.M.”.
The family carried on extensive business in money lending,
rubber plantations, and in real estates in the Federated
States of Malaya, Burma and India.
The property of the undivided family was divided between the
three male members on February 22, 1940. To Meyyappa (1)
were allotted at the partition “business of the family” at
Rangoon and at Karaikudi in the Ramnath District and three
rubber estates in the Federated States of Malaya and some
houses. Even after the partition Meyyappa (1) continued to
remain in management on behalf of himself and his two minor
sons of all the properties ‘and the businesses carried on by
the family when it was joint, and the businesses were
carried on in the name of “M.S.M.M.”.
The houses and the three rubber estates allotted exclusively
to Meyyappa (1) were entered in the books of accounts opened
in the name of “M.M. Ipoh” from the date of the division.
In
68
December 1941 Alagammal gave birth to a son who was named
Chettiappa. Meyyappa (1) and Chettiappa then constituted a
Hindu coparcenary which owned the property and the business
as allotted to Meyyappa (1) in the partition of 1940. On
December 30, 1949 a deed of partition was executed between
Meyyappa (I) and Chokalingam (who had by then attained the
age of majority) in respect of the businesses carried on in
the name of “M.S.M.M.” The businesses were thereafter
carried on in partnership between Meyyappa (1) representing
himself and the minor Chettiappa and Chokalingam Meyyappa
(II) was admitted to the benefits of that partnership. On
April 13, 1950 partition was effected between Meyyappa (1)
and the minor Chettiappa by posting entries in the books of
account of M.M. Ipoh. It was agreed that the properties
entered in the books of account of M.M. Ipoh shall be held
by Meyyappa (1) and Chettiappa in two equal shares, and that
the properties shall continue to remain in the management of
the firm M.S.M.M. to the benefit of which Chettiappa was
admitted. A deed of partition recording the terms of that
partition was executed on May 28, 1953 by Meyyappa (1) and
Alagammal acting as Guardan of the minor Chettiappa.
In 1951 Meyyappa (1) acceded to a demand made by Chocka-
lingam on behalf of the M.S.M.M. firm for a half share in
the “M.M. lpoh properties”. There was however no division
of the properties by metes and bounds, and the management of
those properties as a single unit continued to remain with
the M.S.M.M. firm as before.
Meyyappa (1) was assessed under the Indian Income-tax Act
1922 to tax year after year till the assessment year 1953-54
in respect of the income from the “M. M. lpoh properties”
as a respect individual or as a karta of a Hindu undivided
family. Later the Income-tax Officer, Karaikudi, Ramnath
District, issued notices under s. 34(1) of the Income-tax
Act for the assessment years 1951-52 to 1953-54 and under s.
22(2) for the years 1954-55 to 1956-57 for assessment of the
income of “an association of persons styled M. M. lpoh”.
The Income-tax Officer rejected the contentions raised by
Meyyappa (1) that there was no association of persons of the
nature described in the notices and brought to tax the
income of the “M.M. lpoh properties” as income received by
an association of persons formed by Meyyappa (1) and
Chettiappa in 1951-52, and by Meyyappa (1), the M.S.M.M.
firm and Chettiappa in the years 1952-53 to 1955-57.
In appeals filled by M. M. lpoh, the Appellate Assistant
Commissioner confirmed the orders passed by the Income-tax
Officer subject to the modification that the income from the
houses be assessed under s. 9(3) of the Income-tax Act in
the hands of the members individually, and not as the
collective, income of the association of persons. The
Appellate Tribunal confirmed the order of the Appellate
Assistant Commissioner,
69
The Tribunal drew up a statement of case and submitted under
s. 66(1) of the Indian Income-tax Act, the following ques-
tion for determination of the High Court of Madras:
“Whether the assessments on the ‘Association
of persons’ for assessment years 1951-52 to
1956-57 are valid?”
and declined to submit a statement’ of the case on five
other questions, the first out of which alone is material in
these appeals and need be set out:
“Whether on the facts and in the circumstances
of the case, there are any materials to hold
the assessee as the principal officer of M.M.
lpoh assessed in the status of an association
of persons?”
At the hearing of the reference on the principal question,
the High Court on the application of the assessee proceeded
to deal apparently without any objection from the
Commissioner with the additional question which had not been
referred by the Tribunal.
The High Court held that the income brought to tax in the
assessment year 1951-52 did not accrue to an association of
persons, but the income in the years 1952-53 to 1956-57
accrued to an association of persons formed by Meyyappa (1),
M.S.M.M. firm and the minor Chettiappa. The High Court was
of the view that Meyyappa (1) acted on behalf of Chettiappa
in forming the association, that the affairs of this
association were under the management of Meyyappa (1) during
the account years relevant to the assessment years 1952-53
to 1956-57, that the association of persons was engaged in a
joint enterprise for the purpose of producing income, that
there being “unity purpose and objectivity” the ultimate
object of the association to earn income on behalf of the
members of the association was “fully established”. The
High Court also held that by the notices for assessment of
the income for the years 1952-53 to 1954-55 Meyyappa (1) did
in fact have notice of the intention of the Income-tax
Officer to treat him as the principal officer of the
association, and the proceedings for assessment and
reassessment were properly commenced. The High Court
accordingly by order dated, April 3, 1961 answered the first
question in favour of the assessee in respect of the assess-
ment year 1951-52 and against the assessee for the
subsequent five assessment years. The High Court recorded
in answer to the second question that the Income-tax Officer
was justified in holding Meyyappa (1) to be the principal
officer of “M.M. Ipoh”.
On November 21. 1961 five petitions were moved in the High
Court of Madras under Art. 226 of the Constitution for a
writ of prohibition restraining the Income-tax Officer from
enforcing the demands made by him in respect of the tax
assessed against
70
“the association of persons M.M. lpoh”. In support of the
petitions it was urged that s. 3 of the Indian Income-tax
Act invested the Income-tax Officer with arbitrary and
unguided power to assess to tax the income of an association
of persons in the hands either of the association or of the
persons constituting that association, and on that account
s. 3 offended Art. 14 of the Constitution, and was to that
extent void the High Court rejected the petitions. Against
the orders passed by the High Court in the petitions for
writs, Meyyappa (1) has appealed. Against the orders
recorded by the High Court in references under s. 66 the
association of persons “M.M. lpoh” has appealed.
Section 3 of the Income-tax Act invests the taxing authority
with an option to assess to tax the income collectively of
the association of persons, in the hands of the association
or in separate shares in the hands of the members of the
association. Counsel for the assessee contends that the Act
sets out no principles and discloses no guidance to the
Income-tax Officer in exercising the option: the Act
therefore confers arbitrary and uncontrolled authority upon
the Income-tax Officer to select either the association or
its members for assessment to tax according to his fancy,
and may on that account be discriminatively administered by
subjecting persons similarly situate to varying rates of
tax.
Counsel in support of that plea relied upon the judgment of
this Court in Suraj Mall Mohta & Co. v. A. V. Visvanatha
Sastri and Anr.(1) but that case is of little assistance to
the assessee. In Suraj Mall Mohta’s cave(1) this Court
declared sub-s. (4) of s. 5 of the Taxation of Income
(Investigation Commission) Act 30 of 1947 and the procedure
prescribed by that Act, insofar as it affected the persons
proceeded against under that sub-section, invalid as a piece
of discriminatory legislation and on that account offending
against Art. 14 of the Constitution of India. The Court
held that sub-s. (4) of s. 5 of Act 30 of 1947 dealt with
the same class of persons who fall within the ambit of s. 34
of the Indian Incometax Act 1922 and whose income can be
brought to tax by proceeding under that section: The result
in the view of the Court was that some assessees who had
evaded payment of tax by failing to disclose fully and truly
all material facts necessary for assessment of tax could be
dealt with under Act 30 of 1947 at the choice of the
Commission, though they could also be proceeded with under
s. 34 of the Indian Income-tax Act. Persons discovered as
evaders of income-tax during an investigation under s. 5(1)
of Act 30 of 1947, and persons discovered by the Incometax
Officer to have evaded payment of tax had in the view of the
Court common properties and……… common
characteristics”, and since the procedure prescribed under
Act 30 of 1947 was more
71
drastic and deprived the assessee of valuable rights of
appeal, second appeal and revision, s. 5(4) of Act 30 of
1947 under which a person could be selected for
discriminatory treatment at the choice of the Investigation
Commission was void as infringing tile guarantee of equality
before the law.
But here no question of application of a more drastric pro-
cedure, or deprivation of valuable rights of appeal and
revision, by the adoption of one of two alternative
procedures arises. The procedure for assessment is the same
whether the income is assessed in the hands of the
association or the share of each member of the association
is assessed separately. In Shri Rain Krishna Dalmia v. Shri
Justice S. R. Tendolkar and Ors,(1) S. R. Das,
C. J., observed at p. 299:
“In determining the question of the validity
or otherwise of……… a statute the court
will not strike down the law Out of had only
because no classification appears on its face
or because a discretion is given to the
Government to make the selection or
classification but will go on to examine and
ascertain if the statute has laid down any
principle or policy for the guidance of the
exercise of discretion or classification.
After such scrutiny, the court will strike
down the statute if it does not lay down any
principle or policy for guiding the exercise
of discretion by the Government in the matter
of selection or classification, on the ground
that the statute provides for the delegation
of arbitrary and uncontrolled power to the
Government so as to enable it to discriminate
between persons or things similarly situate
and that, therefore, the discrimination is
inherent in the statute itself.”
In Jyoti Pershad v. The Administrator for the Union Terri-
tory of Delhi(1) this Court observed that where the
Legislature Jays down the policy and indicates the rule or
line of action which should guide the authority, Art. 14 is
not violated, unless the rules or the policy indicated lay
down different criteria to be applied to persons or things
similarly situate. It is not however essential for the
Legislature to comply with the guarantee of equal protection
that the rules for the guidance should be laid down in
express terms. Such guidance may be obtained from or
afforded by (a) the preamble read in the light of the
surrounding circumstances which necessitated the
legislation, taken in conjunction with well-known facts of
which the Court might take judicial notice or of which it is
apprised by evidence before it in the form of affidavits,
(b) or even from the policy and purpose of the enactment
which may be gathered from other operative provisions
(1)[1959] S.C.R. 279.
(2) [1062] 2S.C.R. 125.
72
applicable to analogous or comparable situations or
generally from the object sought to be achieved by the
enactment.
Section 3 of the Income-tax Act does not, it is true,
expressly lay down any policy for the guidance of the
Income-tax Officer in selecting the association or the
members individually as entities in bringing to tax the
income earned by the association. Guidance may still be
gathered from the other provisions of the Act, its scheme,
policy and purpose, and the surrounding circumstances which
necessitated the legislation. In considering whether the
policy or principles are disclosed, regard must be had to
the scheme of the Act. Under the Act of 1922 the Income-tax
Officer is required to issue a general notice calling upon
all persons whose total income during the previous year
exceeds the minimum not chargeable to tax to submit a return
of income. The Income-tax Officer may also serve an
individual notice requiring a person whose income in the
opinion of the Income-tax Officer is liable to tax to submit
a return of income. Primarily the return of income would be
made by an association, where the association has earned
income, and the Income-tax Officer would also call upon the
association to submit a return of its income, and would
ordinarily proceed to assess tax on the return so made. But
for diverse reasons, assessment of the income of the
association may not be possible or that such assessment may
lead to evasion of tax. It would be open to the Income-tax
Officer then to assess the individual members on the shares
received by them. The duty of the Income-tax Officer is to
administer the provisions of the Act in the interests of
public revenue, and to prevent evasion or escapement of tax
legitimately due to the State. Though an executive officer
engaged in the administration of the Act the function of the
Income-tax Officer is fundamentally quasi-judicial. The
Income-tax Officer’s decision of bringing to tax either the
income of the association collectively or the shares of the
members of the association separately is not final, it is
subject to appeal to the Appellate Assistant Commissioner
and to the Tribunal. In Commissioner of Income-tax, U.P. v.
Kanpur Coal Syndicate(1) it was held by this Court that the
Appellate Tribunal has ample power under s. 33(4) to set
aside an assessment made on an association of persons and to
direct the Income-tax Officer to assess the members
individually or to direct amendment of the assessment
already made on the members. Exercise of this power is from
its very nature contemplated to be governed not by
considerations arbitrary but judicial. The nature of the
authority exercised by the Income-tax Officer in a
proceeding to assess to tax income, and his duty to prevent
evasion or escapement of liability to pay tax legitimately
due to tile State, constitute, in our judgment, adequate
enunciation of principles and policy for the guidance of the
Income-tax Officer.
(1) [1964] 53 I.T.R. 225
73
Counsel for the appellants contended that s. 23-A of the
Income-tax Act, as it was incorporated by Act 21 of 1930,
laid down certain principles for the guidance of the Income-
tax Officer in exercising his option, but since the
Legislature by Act 7 of 1939 repealed that provision the
discretion vested in the Incometax Officer to select either
the income of the association or the individual members is
unfettered. To appreciate the argument it is necessary to
set out in some detail the legislative history. Under the
Indian Income-tax Act, 1922, as originally enacted, an
association of persons or individuals was not an entity the
income whereof was charged to tax. By 11. of 1924
“association of individuals” was added in s. 3 and an entity
of which the income is charged to tax under the Income-tax
Act, but the Act as it stood amended contained no statutory
safeguard against double taxation of income earned by an
association of individuals. S. 14(1) of the Act (as it then
stood which aimed at avoiding double taxation of the same
income was applicable to the income of a Hindu undivided
family, to the income of a company distributed as dividends
to share-holders, and to the income of a firm profits
whereof were assessed in its hands. The Legislature amended
s. 14 of the Act by Act 22 of 1930 and remedied the defect
by modifying cl. (c) of sub-s. (2) of s. 14 of the Act and
provided that “any sum which he (the assessee) received as
his share of the profits or gains of an association of
individuals, other than a Hindu undivided family, company or
firm, where such profits or gains have been assessed to
income-tax”, shall not be subject to tax. The Legislature
also enacted Act 21 of 1930 which made several modifications
in the Income-tax Act. It provided for registration of
firms and added s. 23A which provided:
“(1) Where the Income-tax Officer is satisfied
that any firm or other association of
individuals carrying on any business, other
than a Hindu undivided family or a company, is
under the control of one member thereof, and
that such firm or association has been formed
or is being used for the purpose of evading or
reducing the liability to tax of any member
thereof, he may, with the previous approval of
the Assistant Commissioner pass an order that
the sum payable as income-tax by the firm or
association shall not be determined, and
thereupon the share of each member in the
profits and gains of the firm or association
shall be included in his total income for the
purpose of his assessment thereon.”
A similar provision with regard to companies was also
incorporated in sub-s. (2) of s. 23A. Broadly speaking, by
the amended provision discretion was given to the Income-tax
Officer to treat as separate entities for the purpose of
taxation the individuals formed any association carrying on
business, of which only one
74
member was competent to bind the association by his acts,
and to give to the Income-tax Officer discretion to treat
the members of a company as separate entities in certain
conditions-. But s. 23A (1) as enacted by Act 21 of 1930
applied only to first and association of individuals if the
management was in the hands of one person: it did not in
terms apply to cases where the management was in the hands
of more persons than one, even if it was formed for the
purpose of evading or reducing the liability to tax of any
member thereof. By Act 7 of 1939 the expression “asso-
ciation of persons” was substituted for “association of
individuals”-, s. 23A(1) was deleted; and sub-s. (5) was
added to s. 23. Sub-section (5) of s. 23 prescribed the
mechanism for bringing to tax the income of a firm
registered or unregistered. If the firm was registered, the
share of each partner was to be separately taken into
account together with his other income and brought to tax.
If it was an unregistered firm, the income of the firm
itself was brought to tax, unless the Income-tax Officer
wits of the opinion that the correct amount of the tax
including super-tax, if any, payable by the partners under
the procedure applicable to a registered firm would be
greater than the aggregate amount payable by the firm and
the partners if the firm is assessed as an unregistered
firm. In respect of unregistered firms a practical scheme
which aimed at preventing evasion of tax was devised by
enactment of s. 23(5)(b).
After the repeal of s. 23A (1) as introduced by Act 21 of
1930 no similar provision conferring discretion upon the
Income-tax Officer similar to the discretion which is
prescribed by the terms of s. 23(5)(b) in respect of the
income of the unregistered firms was expressly enacted. But
it cannot be inferred that it was intended to make the
discretion of the Income-tax Officer qua the assessment to
tax the income of an association of persons in the hands of
individual members collectively, arbitrary or unfettered.
By the repeal of s. 23A(1) the essential nature of the power
of an Income-tax Officer was not altered. He remained as
before under a duty to administer the Act, for the benefit
of public revenue, but his powers were to be exercised
judicially and so as to avoid double taxation of the same
income.
This resume of the legislative provisions discloses that the
relevant provisions were made with it view to ensure against
evasion of tax, while ensuring that the same income shall
not be charged more than once.
The policy and the purpose of the Act may be gathered from
other operative provisions applicable to analogous or
comparable situations”: Jyoti Pershad’s case(1) at p. 139:
and there can
(1) [1962] 2 S.C.R. 125.
75
be no doubt that an unregistered firm and an association of
persons are closely analogous. If the income is earned by
an association of persons, normally a return would be made
or asked for under s. 22 from the association, and the
income of the association would be brought to tax. If, it
appears to the Income-tax Officer that by taxing the
association of persons evasion of tax or escapement of tax
liability may result, he is given a discretion to tax the
individual members: but the discretion is to be exercised
judicially and not arbitrarily, and its exercise is capable
of rectification by superior authorities exercising judicial
functions.
It cannot therefore be said that there is, by investing
authority in the Income-tax Officer to select the
association of persons or individual members thereof for the
purpose of assessing to tax the income of the association,
denial of equality before the law between persons similarly
situate within the meaning of Art. 14 of the Constitution so
as to render s. 3 insofar as it confers power upon the
Income-tax Officer to select either the association of
persons or the members thereof for assessment to tax in
respect of the income of the association void. Appeals Nos.
1103-1107 of 1966 must therefore fail.
In the group of appeals which arise out of the order passed
by the High Court in exercise of its advisory jurisdiction
under the Income-tax Act, counsel for the assessee urged
that there was no association in fact; that Chettiappa being
at all material times a minor there could in law be no
association of which the income could be brought to tax, and
that in any event there was no evidence to prove that any
one on behalf of Chettiappa had assented to the formation of
the association.
The expression “person” is defined in s. 2(9) of the Indian
Income-tax Act, 1922 as including “a Hindu undivided family
and a local authority”. The definition is inclusive and
resort may appropriately be had to the General Clauses Act
to ascertain the meaning of the expression “person”. Clause
(42) of s. 3 of the General Clauses Act defines a “person”
as inclusive of any company, association or body of
individuals whether incorporated or not, and that inclusive
definition in the General Clauses Act would also apply under
the Income-tax Act. A firm is therefore a “Person” within
the meaning of the Income-tax Act, and a firm and an
individual or group of individuals may form an association
of persons within the meaning of s. 3 of the Indian Income-
tax Act.
There is nothing, in the Act which indicates that a minor
cannot become a member of an association of persons for the
purposes of the Act. In Commissioner of Income-Tax, Bombay
v. Laxmidas and Anr.(1) it was held that the fact that one
of the
(1) [1937] I.T.R. 584.
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individuals was a minor did not affect the existence of the
association, if in point of fact, the assessees had
associated together for the purpose of gain. In
Commissioner of Income-tax, Bombay North, Kutch and
Saurashtra v.Indira Balkrishna(1) it was held “that the word
“associate” means……….. to join in common purpose, or
to join in an action’. Therefore, and association of
persons must be one in which two or more persons join in a
common purpose or common action, and as the words occur in a
section which imposes a tax on income, the association must
be one the object of which is to produce income, profits or
gains.”
In the case before us, there is abundant material, to prove
that Meyyappa (1), his minor son Chettiappa and M.S.M.M.
firm formed an association in the years 1952-53 to 1956-57.
To review the.relevant facts: the “M.M. Ipoh properties”
which were allotted to Meyyappa (1) at the partition in 1940
became on the birth of Chettiappa, Properties of a
coparcenary, and it is common ground that Chettiappa
acquired a share in the income which Meyyappa (1) received
from the M.S.M.M. firm: the “M.M. Ipoh properties” were,used
in a trading venture and were managed by the M.S.M.M. firm-
the selling agency was common between M.S.M.M. firm and
“M.M. Ipoh”: the stocks and expenditure of the M.M. Ipoh
firm were not ;separately determined and common books of
account were maintained for the management of the M.M. Ipoh
properties and the M.S.M.M. firm dealings.
Alagammal-mother of Chettiappa-had executed the deed of
partition dated April 13, 1950 as the guardian of
Chettiappa. By the deed she acknowledged having received
the share of Chettiappa in the property. The Tribunal found
that the management was entrusted to the M.S.M.M. firm on
behalf of “M.M. Ipoh”, and that in entrusting the management
Alagammal must have given her consent. In paragraph II of
the statement of the case, the Tribunal observed:
“The integrity and management of the estates
have continued undisturbed right throughout
the period, only the holding thereof by
various members having changed from time to
time. The volition necessary is only all too
apparent the entrustment of the management to
M.S.M.M. firm for ,a proper management implies
a prior agreement to which the guardian of the
minor must have given her consent too,”
These observations relate to the entire period of six years
1951-52 to 1956-57. In the view of the High Court division
of the status of joint Hindu family on April 13, 1950
between Meyyappa (1) and. Chettiappa was brought about not
as a result of any mutual agreement between the coparceners,
but by Meyyappa (1 in exercise of his power to do so under
the Hindu law, and “solely from the feature that the share
of minor son Chhettiappa was not separated by metes and
bounds, a conclusion could
(1) [1960] 39 I.T.R. 546.
77
not be “reached that Meyyappa (1) and Chettiappa continued
as members of an association of persons. The minor had no
volition of his own to express, and the fact that at the
partition the minor was represented for purposes of form and
nothing more by his father, cannot be taken to mean that the
mother as his guardian exercised any volition on behalf of
the minor.” In the view of the High Court “to form an
association of persons no agreement enforceable at law was
necessary”: but that “is not the same thin- as to say that
an agreement–express or implied-may be inferred where none
can possibly exist. The High Court rejected the
contention raised on behalf of the Revenue that the father
must have acted as the guardian of the minor in forming the
association in 1951-52. The High Court however held that in
the year 1952-53 and subsequent years an association of
persons was formed and Meyyappa (1) joined that association
on behalf of himself and Chettiappa. Counsel for the
assessee contends that once the High Court reached the
conclusion that in the year 1951-52 there was no association
of persons, the conclusion that an association of persons
existed in the subsequent years could not be reached in
the absence of positive evidence to show that after the
close of the year 1951-52 an association of persons was
actually formed.
We are not called upon in these appeals to consider whether
the learned Judges of the High Court were right in the view
which they have taken insofar as it relates to the
assessment year 1951-52. We are only called upon to
consider whether the conclusion of the Tribunal that in fact
an association of persons existed in the year 1952-53 Ind
subsequent years was based on any evidence. In our judgment
the facts proved clearly show that there was such an
association in the years 1952-53 and the subsequent years.
Pursuant to the three partitions no division by metes and
bounds of the shares of the owners was made, only the shares
in the income of the owner were entered in the books of
account. There was common management of the properties, and
there was even a common. selling agency.Alagammal had acted
as a guardian of Chettiappa in the deed of partition. The
Tribunal inferred that Alagammal must have assented to the
formation of the association on behalf of Chettiappa and in
the various transactions relating to the entrustment of
management. It is true that this finding related to the
year 1951-52 as well, and the High Court has disagreed with
that finding insofar as it related to the year 1951-52. But
on that account the finding of the Tribunal in respect of
the subsequent years cannot be discarded. The Association
which has earned income in the years 1952-53 and thereafter
is an association different from the association in 1951-52.
In 1951 Chokalingam had demanded a share in the “properties
of M.M. lpoh and he was given a half share. The shares of
Meyyappa (1) and Chettiappa in the properties were
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reduced, and thereafter ownership in the “properties of M.M.
Ipoh” and its activities vested in an association formed by
Meyyappa (1), the M.S.M.M. firm and Chettiappa. It is
common ground that “M.M. Ipoh” was a trading venture and its
management was entrusted in the relevant years to the
M.S.M.M. firm.
The doctrine of res judicata does not apply so as to make a
decision on a question of fact or law in a proceeding for
assessment in one year binding in another year. The
assessment and the facts found are conclusive only in the
year of assessment: the findings on questions of fact may be
good and cogent evidence in subsequent years, when the same
question falls to be determined in another year, but they
are not binding and conclusive. The finding recorded by the
High Court that in the year 1951-52 there was no association
of persons constituted by Meyyappa (1) and Chettiappa for
earning income from M.M. Ipoh properties will not in the
present case have any effect on the finding of the Tribunal
that in year 1952-53 and the subsequent years such an
association existed. It must again be remembered that the
association of persons which traded in 1952-53 and the
subsequent years was an association different from the
association in 1951-52. After the reduction in the shares
of Meyyappa (1) and Chettiappa in the “M.M. Ipoh properties”
a fresh arrangement for entrustment of the management of the
properties to the M.S.M.M. firm was necessary and according
to the findings of the Tribunal, Alagammal assented on
behalf of Chettiappa to that arrangement.
Counsel for assessee contended that for the finding that
Alagammal assented on behalf of Chettiappa to form an
association was not supported by any evidence on the record.
But from readjustment of the shares in the “M.M. Ipoh
properties”, admission of Chettiappa to the benefits of
M.S.M.M. firm and the management of “M.M. Ipoh properties”
to continuing F to remain with the M.S.M.M. firm, with a
common selling agency, and the execution of the deed of
partition by Alagammal, an inference could reasonably be
made that a person purporting to act as guardian of
Chettiappa concurred in forming the association and that the
person so concurring was Alagammal. The finding recorded by
the Tribunal is one of fact, and was not liable a to be
questioned before the High Court. It is also pertinent to
note that the finding that Alagammal acted on behalf of
Chettiappa in forming the association for the years 1952-53
was never challenged and was not sought to be made the
subject of a question in an application to the Tribunal
under s. 66(1) and no question in that behalf was referred
to the High Court. It is true that the High Court was of
the view that in the years 1952-53 to 1956-57 Meyyappa (1)
acted on behalf of Chettiappa in forming the association.
But the High Court in a reference under s. 66 of the Income-
tax Act was incompetent to disturb what was
79
essentially a finding of fact recorded by the Tribunal and
arrive at another finding.
On the other question which has been answered by the High
Court the Tribunal declined to submit a statement of the
case, because in their view it did not arise out of their
order. They pointed out that a ground in support thereof
was taken in the memorandum of appeal, but as it was not
pressed before the Appellate Assistant Commissioner. they
did not deal with it. The High Court observed that the
Tribunal was bound to deal with the question irrespective of
whether it was agitated before the Appellate Assistant
Commissioner. Even assuming that the second question was
properly raised in the form and in the manner in which it
was raised by the High Court, the answer to the question
must, on the facts found, be against the assessee. Counsel
for the assessee contended that there were no materials on
which the Tribunal could hold that Meyyappa (1) was the
principal officer of “M.M. Ipoh”, and since the Income-tax
Officer had made no enquiry before issuing the notice
treating Meyyappa (1) was the principal officer of “M.M.
Ipoh”, Meyyappa (1) could not be so treated for the purpose
of the proceedings for assessment. Under s. 22(2), the
Income-tax Officer may, if in his opinion the income of a
person is liable to income-tax, serve a notice upon him
requiring him to furnish a return in the prescribed form.
The notice under s. 34 for re-assessment must also contain
all or any of the requirements which may be included in a
notice under sub-S. (2) of S. 22. Such a notice may be
served under s. 63(2) of the Income-tax Act upon the
principal officer of an association of persons. Under the
definition in s. 2(12) a “Principal officer”omitting parts
not material-“used with reference to….. any association
means-(a) . . . . (b) any person connected with the
authority, company, body, or association upon whom the
Incometax Officer has served a notice of his intention of
treating him as the principal officer thereof;”. The
Income-tax Officer Karaikudi assessed the income of “the
association M.M. Ipoh by its principal officer M.S.M.M.
Meyyappa Chettiyar”. No objection was ever raised before
the Income-tax Officer about the regularity of the
proceedings and the Income-tax Officer found that Meyyappa
(1) was the principal officer of the association. Even
before the Appellate Assistant Commissioner it was not
argued that Meyyappa (1) was not the principal officer. For
the first time that ground was taken before the Tribunal.
The notices served on Meyyappa (1) are not printed in the
record prepared for use in this Court. In the orders of
assessment for the year 1952-53 and the subsequent years it
is recorded that action was taken to bring to tax the income
of “M.M. Ipoh”, and in response to the notices the principal
officer Meyyappa (1) had filed returns. The assessee
submitted an application under s. 66(2) during the course of
the hearing before the High Court of the question referred
by the
80
Tribunal. The High Court granted that application and
without calling for a formal statement of the case on the
‘question sought to be raised, heard the parties. It may be
reasonably assumed that the assessee was prepared to argue
the case on the footing that the statements in the orders of
the Income-tax Officer were correct. In the circumstances
it must be held that the Income-tax Officer did, serve a
notice of his intention to treat a person connected with the
association as the principal officer thereof. The Income-
tax Officer assessed the income of the association as repre-
ented by Meyyappa (1) its principal officer. There is, in
our judgment, nothing in the Act which supports the
contention of counsel for the assessee that before
proceedings in assessment can commence against an
association of persons a notice must in the first instance
be issued and an order passed after giving opportunity to
the person proposed to be treated as the principal officer
opportunity to show cause why he should not be so treated.
It is open to the Income-tax Officer to serve a notice on a
person who it is intended to be treated as the principal
officer. The person so served may object that he is not the
principal officer or that the association is not properly
formed. The Income-tax Officer will then consider whether
the person served is the principal officer and whether he
has some connection or concern with the income sought to be
assessed. There is in the Income-tax Act an analogous
provision in s. 43 of the Act which authorises the Income-
tax Officer to treat a person as a statutory agent of the
non-resident for the purpose of assessing him to tax, the
income received by the non-resident. It was held by the
Judicial Committee in Commissioner of Income-tax, Punjab &
N.W.F.P. v. Nawal Kishore Kharaiti Lai(1) that it is not
necessary for the validity of a notice calling for a return
of the income under S. 23(2) served on a person as agent of
a non-resident under S. 43, that it should have been
preceded not only by the notice of intimation prescribed by
s. 43, but also by an order declaring the person to be agent
of the non-resident or treating him as such. The Income-tax
Officer may postpone any final determination of the dispute
until the time comes to make an assessment under S. 23 of
the Act. In our judgment, the same principle applies to a
case in which in the assessment of the income of an
association of persons or person is to be treated as a
principal officer of that association. If the person
described as a principal officer of an association is duly
served with a notice under S. 23(2) in the manner prescribed
by s. 63(2), an adjudication of his status as the principal
officer before assessment proceedings may take place is not
obligatory. The order assessing the association containing
a finding that the person served is the principal officer is
sufficient compliance with the requirements of the statute.
It is open to the association to challenge the finding of
the Income-tax Officer
81
in appeal before the Appellate Assistant Commissioner and in
further appeal to the Appellate Tribunal. But the order
declaring him as the principal officer of an association of
persons will not be deemed to be void merely because the
proceeding for assessment was not preceded by a declaration
of the status of the person treated as the principal
officer.
The appeals Nos. 1060-1964 of 1965 must also fail and are
dismissed with costs. There will be one hearing fee in
appeals Nos. 1103-1107 of 1966 and one hearing fee in
appeals Nos. 1060-1064 of 1965.
R.K.P.S.
Appeals dismissed.
82