A court receiver is running the dissolved firm's business and paying each of us a monthly sum. The department wants to tax the profits as an AOP. Can it, when we are fighting each other?
Yes, on these facts. The receivers themselves are not an association of persons — they are representatives — but the persons they represent were held to be an AOP, because the control and management of the business was unified, the profits were earned on behalf of persons having a common interest created by the court's order, and all of them took the monthly payments. Liability to tax depends on the earning of profits by a unit, not on how the profits are ultimately divided.
Decided by the Supreme Court (J.C. Shah J, K.S. Hegde J and A.N. Grover J (judgment of the Court delivered by Hegde J)) on 1970-04-23, reported as 1970 AIR 1707; 1971 SCR (1) 340; 1970 SCC (2) 139. It bears on section 2(31), section 161, section 160 of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
This is the Revenue-side authority in the AOP line, and it is the one the department cites whenever a business is run for several owners by a common hand — receivers, administrators, joint managers, heirs pending partition. Two things in it do the work. First, the existence of defined shares does not prevent an AOP: 'the existence of specific or defined interest in the profits did not make the earning any the less by an association of persons.' Second, acquiescence is enough — a partner who objected to the continuance of the business but took his monthly payments was held to have acquiesced. The counterweight is that this reasoning was expressly refused an extension to private trusts in Marsons Beneficiary Trust, where the beneficiaries had not authorised the trustees to carry on business.
Binding on every court and authority in India.
Read aloud by your device. Press again to stop.
N.V. Shanmugam and Co. manufactured and sold snuff under a partnership deed of 20 April 1955, the partners being S.P. Ramiah Nadar, Murugavel Nadar and Shanmughavel Nadar, with a minor, S.P. Mohan, admitted to the benefits with a one-sixth share of net profits. On 17 September 1956 Ramiah Nadar sued in the City Civil Court, Madras, for dissolution with effect from 31 August 1956 and for accounts, and applied for a receiver. On 21 September 1956 the court appointed three receivers — two of the partners and an advocate, Ram Mohan — and directed them to reopen and conduct the snuff business for the purpose of winding up, with power to realise outstandings and discharge dues. The order provided that the receivers could carry on the business normally, that all parties had access to books and premises and were entitled to information, that profits from 1 September 1956 would be an asset of the firm divisible as under the partnership deed and that the receivers took no share for management, and that the receivers would pay monthly Rs 1,500 each to the plaintiff and the first defendant and Rs 750 each to the second and third defendants from 1 November 1956. A Commissioner was later appointed to take accounts and arrange a sale of the business as a going concern, but no sale took place. The business made profits of Rs 93,739 in assessment year 1958-59 and Rs 1,54,393 in 1959-60. The receivers filed 'nil' returns showing the profits in section D and contended the income should be assessed in the beneficiaries' hands, they being assessees with other sources. The Income-tax Officer held the business was carried on by an association of persons; the Appellate Assistant Commissioner agreed; the Tribunal held the profits assessable in the individual partners' hands at their own rates; and on a reference the Madras High Court answered in favour of the Revenue.
The appeals were dismissed with costs. The answer to the question referred was that the profits in question were earned from a business carried on by an 'association of persons'. The receivers were not themselves an association of persons and their liability arose under s.41 read with s.10 of the 1922 Act, but the erstwhile partners whom they represented constituted an association of persons.
The receivers were merely the representatives of the real owners, whose was the primary liability; the fact that there were three of them was irrelevant, and the representative provision imposes no separate charge but only empowers the Revenue to levy on and recover from a representative what could have been levied on the person represented. The real question was whether the persons represented constituted an association of persons. The business was carried on by the receivers on behalf of the erstwhile partners, the control and management was unified, and the receivers, who could not have represented the individual interests of the various owners without chaos, joined in a common purpose and acted jointly on behalf of the owners; the profits were earned on behalf of persons having a common interest created by the court's order. Defined shares in the profits do not prevent the earning from being by an association of persons, because liability depends on earning by a unit and not on the ultimate division. Applying Indira Balkrishna and the Elias formulation, 'associate' means to join in a common purpose or action, and the object must be to produce income. Although one erstwhile partner had objected to the continuance of the partnership, all the owners, including him, took monthly amounts from the business and none declined them, which meant all had acquiesced; the course of conduct of the parties is relevant in deciding who carried on a business. Mohamad Noorullah was applied notwithstanding the assessee's attempt to distinguish it on the ground of consent, and the case was held to fall directly within Buldana District Main Cloth Importers Group, where members put together by a District officer and asked to act together were nonetheless an association of persons.
Liability to tax depends upon the earning of profits by a unit and not upon the ultimate division of the profits.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppYes, on these facts. The receivers themselves are not an association of persons — they are representatives — but the persons they represent were held to be an AOP, because the control and management of the business was unified, the profits were earned on behalf of persons having a common interest created by the court's order, and all of them took the monthly payments. Liability to tax depends on the earning of profits by a unit, not on how the profits are ultimately divided. This was decided by the Supreme Court (J.C. Shah J, K.S. Hegde J and A.N. Grover J (judgment of the Court delivered by Hegde J)) and bears on section 2(31), section 161, section 160 of the Income Tax Act 1961. It is reported as 1970 AIR 1707; 1971 SCR (1) 340; 1970 SCC (2) 139. This is the Revenue-side authority in the AOP line, and it is the one the department cites whenever a business is run for several owners by a common hand — receivers, administrators, joint managers, heirs pending partition. Two things in it do the work. First, the existence of defined shares does not prevent an AOP: 'the existence of specific or defined interest in the profits did not make the earning any the less by an association of persons.' Second, acquiescence is enough — a partner who objected to the continuance of the business but took his monthly payments was held to have acquiesced. The counterweight is that this reasoning was expressly refused an extension to private trusts in Marsons Beneficiary Trust, where the beneficiaries had not authorised the trustees to carry on business. If it applies to you, the first step is this: Separate the two questions the Court separated: whether the representatives are an AOP (they are not, merely by being several) and whether the persons represented are.
N.V. Shanmugam and Co. manufactured and sold snuff under a partnership deed of 20 April 1955, the partners being S.P. Ramiah Nadar, Murugavel Nadar and Shanmughavel Nadar, with a minor, S.P. Mohan, admitted to the benefits with a one-sixth share of net profits. On 17 September 1956 Ramiah Nadar sued in the City Civil Court, Madras, for dissolution with effect from 31 August 1956 and for accounts, and applied for a receiver. On 21 September 1956 the court appointed three receivers — two of the partners and an advocate, Ram Mohan — and directed them to reopen and conduct the snuff business for the purpose of winding up, with power to realise outstandings and discharge dues. The order provided that the receivers could carry on the business normally, that all parties had access to books and premises and were entitled to information, that profits from 1 September 1956 would be an asset of the firm divisible as under the partnership deed and that the receivers took no share for management, and that the receivers would pay monthly Rs 1,500 each to the plaintiff and the first defendant and Rs 750 each to the second and third defendants from 1 November 1956. A Commissioner was later appointed to take accounts and arrange a sale of the business as a going concern, but no sale took place. The business made profits of Rs 93,739 in assessment year 1958-59 and Rs 1,54,393 in 1959-60. The receivers filed 'nil' returns showing the profits in section D and contended the income should be assessed in the beneficiaries' hands, they being assessees with other sources. The Income-tax Officer held the business was carried on by an association of persons; the Appellate Assistant Commissioner agreed; the Tribunal held the profits assessable in the individual partners' hands at their own rates; and on a reference the Madras High Court answered in favour of the Revenue. The matter was decided on 1970-04-23 by the Supreme Court (J.C. Shah J, K.S. Hegde J and A.N. Grover J (judgment of the Court delivered by Hegde J)). On those facts the Supreme Court held as follows. The appeals were dismissed with costs. The answer to the question referred was that the profits in question were earned from a business carried on by an 'association of persons'. The receivers were not themselves an association of persons and their liability arose under s.41 read with s.10 of the 1922 Act, but the erstwhile partners whom they represented constituted an association of persons.
The receivers were merely the representatives of the real owners, whose was the primary liability; the fact that there were three of them was irrelevant, and the representative provision imposes no separate charge but only empowers the Revenue to levy on and recover from a representative what could have been levied on the person represented. The real question was whether the persons represented constituted an association of persons. The business was carried on by the receivers on behalf of the erstwhile partners, the control and management was unified, and the receivers, who could not have represented the individual interests of the various owners without chaos, joined in a common purpose and acted jointly on behalf of the owners; the profits were earned on behalf of persons having a common interest created by the court's order. Defined shares in the profits do not prevent the earning from being by an association of persons, because liability depends on earning by a unit and not on the ultimate division. Applying Indira Balkrishna and the Elias formulation, 'associate' means to join in a common purpose or action, and the object must be to produce income. Although one erstwhile partner had objected to the continuance of the partnership, all the owners, including him, took monthly amounts from the business and none declined them, which meant all had acquiesced; the course of conduct of the parties is relevant in deciding who carried on a business. Mohamad Noorullah was applied notwithstanding the assessee's attempt to distinguish it on the ground of consent, and the case was held to fall directly within Buldana District Main Cloth Importers Group, where members put together by a District officer and asked to act together were nonetheless an association of persons. In the words reproduced by the source cited on this page: "Liability to tax depends upon the earning of profits by a unit and not upon the ultimate division of the profits." The decision followed or applied CIT v. Indira Balkrishna [1960] 39 ITR 546 (SC) — applied; Mohamad Noorullah v. CIT [1961] 42 ITR 115 (SC) — applied; CIT, Poona v. Buldana District Main Cloth Importers Group [1961] 42 ITR 172 (SC) — applied; CIT v. Balwantrai Jethalal Vaidya [1958] 34 ITR 187 (Bom) and C.R. Nagappa v. CIT [1969] 73 ITR 626 (SC) — relied on by the assessee, not displaced but held not to answer the AOP question.
It was decided by the Supreme Court on 1970-04-23 and is reported as 1970 AIR 1707; 1971 SCR (1) 340; 1970 SCC (2) 139. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 2(31), section 161, section 160, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were dismissed with costs. The answer to the question referred was that the profits in question were earned from a business carried on by an 'association of persons'. The receivers were not themselves an association of persons and their liability arose under s.41 read with s.10 of the 1922 Act, but the erstwhile partners whom they represented constituted an association of persons. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 2(31), section 161, section 160 of the Income Tax Act 1961, and was decided by J.C. Shah J, K.S. Hegde J and A.N. Grover J (judgment of the Court delivered by Hegde J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Look for unity of control and management and for a common interest in the earning, not for a voluntary agreement. Compulsion did not defeat AOP status in Buldana District Main Cloth Importers Group, which the Court applied. Do not rest an anti-AOP argument on defined shares alone — the Court rejected exactly that. If the receipts were accepted without protest, expect acquiescence to be found. Where a client genuinely objects, the objection must be to the continuance of the business and must be accompanied by refusal of the distributions. Where the vehicle is a trust rather than a receivership, use Marsons: the beneficiaries derive nothing from each other and have not authorised the business, so Shanmugham does not travel.
Still good law. Later treatment checked only to this extent: the Bombay High Court in CIT v. Marsons Beneficiary Trust, decided 24 July 1990, considered Shanmugham at paras 9 to 13, did not doubt it, and held it inapplicable to trustees carrying on business under a trust deed because the beneficiaries had neither come together for a common purpose nor authorised the business. That judgment was read in full for this batch. No wider search for later treatment was run. The judgment is on the 1922 Act; its AOP reasoning is applied under s.2(31) of the 1961 Act, and s.2(31) has since acquired an Explanation (Finance Act 2002) which was not before the Court. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Decided under the Indian Income-tax Act 1922: s.3 (charge), s.10 (business) and s.41 (representative liability), the last being in the same terms as s.161(1) of the 1961 Act — the Court itself said the receivers were 'only representative assessees' 'to borrow the expression from the Income-tax Act, 1961'. The 'sections' field therefore records the 1961 Act provisions the case is used for, not the 1922 sections litigated. The report gives the date of judgment as 23 April 1970 and the citations 1970 AIR 1707, 1971 SCR (1) 340 and 1970 SCC (2) 139; the ITR citation is given variously in later judgments (Marsons cites '[1971] 81 ITR 810 (SC)') and is not reproduced in the text read, so it is not listed. The report carries transcription errors — 'makethere' for 'make them', 'actd' for 'acted', 'creatd' for 'created', 'businezs' for 'business'. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed with costs. The answer to the question referred was that the profits in question were earned from a business carried on by an 'association of persons'. The receivers were not themselves an association of persons and their liability arose under s.41 read with s.10 of the 1922 Act, but the erstwhile partners whom they represented constituted an association of persons.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
Our family divided the income but not the properties. Is that a partition the department must accept?
What has to happen before a search at someone else's premises can be used against you?
What actually counts as a 'mistake apparent from the record' under s.154?
My mother gifted shares to my HUF. Is she a 'relative' of the HUF?