Section 2(31)

Section 2(31) — the law in short

What the courts have decided on section 2(31), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• PCIT v Ramesh Chandra Rai Supreme CourtHelps taxpayer
  The AO has added my share of the syndicate's profit straight to my own return. Can he do that without assessing the syndicate?
  No. An association of persons is a separate person under s.2(31) and its income has to be assessed in its own hands. The Assessing Officer cannot bypass that and club the member's share, and the disallowances he thinks the syndicate should have suffered, into the member's individual assessment. Section 86 then decides what, if anything, the member includes.
• Manish Maheshwari v ACIT Supreme CourtHelps taxpayer
  What has to happen before a search at someone else's premises can be used against you?
  Three things, in order: satisfaction recorded that the undisclosed income is yours, the seized material handed to your Assessing Officer, and only then proceedings begun against you. They are conditions precedent, not formalities.
• ITO v Ch. Atchaiah Supreme CourtHelps department
  The Department assessed my share of a gain in my own hands years ago and has now issued a notice seeking to assess the same gain in the hands of the association. Has it not already exercised its option?
  There is no such option under the Income-tax Act, 1961. The Supreme Court held that unlike section 3 of the Indian Income-tax Act, 1922 — which expressly allowed the officer to charge either the association of persons or the members individually — section 4 read with section 2(31) of the 1961 Act contains no words giving any such choice, and that the officer 'can, and he must, tax the right person and the right person alone'. It follows that the fact that a wrong person has been taxed on an income does not preclude the Assessing Officer from taxing the right person on it, whichever course is more beneficial to the Revenue; the person wrongly taxed has his own remedies. Where Parliament intended to give a discretion under the 1961 Act it said so expressly — the Court pointed to section 183 as the example.
• Kalloomal Tapeswari Prasad (HUF) v CIT Supreme CourtHelps department
  Our family divided the income but not the properties. Is that a partition the department must accept?
  No. Where the property admits of physical division, dividing the income while leaving the property undivided is not a partition for tax purposes, and mere severance of status under Hindu law is not enough. Until a finding recognising the partition is recorded under s.171, the family is deemed to continue undivided and the income remains assessable in its hands.
• Pushpa Devi v. CIT — the right to blend is limited to coparceners, so a Hindu female who is not a coparcener cannot throw her separate property into the family stock Supreme CourtHelps department
  A lady member of a Hindu undivided family made a sworn declaration throwing her own money and her share in a business into the family stock, and the family has been offering the income ever since. The Assessing Officer says the income is still hers. Who is right?
  On these facts the Assessing Officer. The Supreme Court held that the true rule of blending is that the right to blend is limited to coparceners: it is the coparcener who alone can blend his separate property with joint family property, and the right is not available to a female who, though a member of the joint family, is not a coparcener — and it makes no difference whether the separate property is her absolute property or one in which she has a limited estate. The income was therefore not assessable in the hands of the family on the footing of blending. The Court nevertheless allowed the appeal in part on the second question: the declaration was held to amount to a gift by the appellant to the undivided family, and the income of the property so gifted was directed to be brought to tax consistently with that finding and in accordance with law.
• Surjit Lal Chhabda v CIT Supreme CourtHelps department
  I have no son. If I throw my self-acquired property into the family hotchpot, will its income be taxed as the income of a Hindu undivided family of myself, my wife and my daughter?
  No. The Supreme Court held that where property that was never joint family property is thrown into the hotchpot by a man who has no son, the income remains his own for tax. His wife and unmarried daughter are not coparceners: they had a right of maintenance out of the income before, and they have the same right and no more afterwards - neither a right by birth, nor a right to demand partition, nor any power to restrain an alienation. Since his personal law still regards him as the owner and the income as his, it is chargeable as his individual income.
• C. Krishna Prasad v. CIT — a single person is not a family: the sole surviving coparcener with no other member is assessed as an individual Supreme CourtHelps department
  My client took his share on a partition and is now the only member — unmarried, no wife, no children. He wants to file as an HUF because the property he received is ancestral. Can he?
  No. The Supreme Court held that a single person, male or female, does not constitute a family, and that an assessment in the status of a Hindu undivided family can be made only when there are two or more members. "Family" connotes a group of people related by blood or marriage; plurality of persons is an essential attribute of a family; and s.2(31) treats a Hindu undivided family as an entity distinct and different from an individual. The appeal was dismissed with costs and the assessee remained assessable as an individual.
• G. Murugesan & Bros v CIT Supreme CourtCuts both ways
  My brothers and I were gifted shares jointly and the dividends were collected together. The officer is assessing us as an association of persons. Are we one?
  Not on those facts alone. The Supreme Court held that an association of persons is formed only when two or more persons voluntarily combine for a common purpose of producing income, so volition is an essential ingredient. Where the income is dividends, there is no act of management, and the mere facts that shares are jointly owned and dividends jointly received do not show that the holders acted as an association. But for the two years in which the assessees had themselves returned as an association, that admission was important evidence and the assessment stood. For the later four years, in which they said they had ceased, they succeeded.
• T. S. Balaram, ITO v Volkart Brothers Supreme CourtHelps taxpayer
  What actually counts as a 'mistake apparent from the record' under s.154?
  An obvious and patent mistake. Not one that must be established by a long drawn process of reasoning on points where two opinions are conceivable. A decision on a debatable point of law cannot be rectified.
• Raj Kumar Singh Hukam Chandji v CIT Supreme CourtHelps taxpayer
  I am the karta and my family's funds bought the shares that qualified me to be managing director. Is my managing director's salary my own income or the family's?
  Your own, on these facts. The Supreme Court held that the managing director's remuneration received by Raj Kumar Singh was assessable as his individual income and not as the income of his Hindu undivided family. The broad test is whether the remuneration was in substance a return to the family for the investment of its funds in the business, or compensation for the services of the individual coparcener. Here he was elected managing director by the board, was paid for personal services, and was not appointed as a result of any outlay or detriment to family property. The office was one of personal responsibility and ability.
• N.V. Shanmugham & Co v CIT Supreme CourtHelps department
  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.
• N.V. Narendranath v. CWT — property taken on partition by a coparcener who has a wife and daughters is held as a Hindu undivided family, not as an individual (Wealth-tax Act, 1957) Supreme CourtHelps taxpayer
  My client received ancestral property on a partition with his father and brothers. His family is himself, his wife and two minor daughters — no son. The officer says that with no second male member he must be assessed as an individual. Is that right?
  No. The Supreme Court held there is no warrant for the contention that there must be at least two male members to form a Hindu undivided family as a taxable unit. The expression "Hindu Undivided Family" in the Wealth Tax Act is used in the sense in which a Hindu joint family is understood in the personal law of Hindus; under that law a joint family may consist of a single male member and his wife and daughters; and there is nothing in the scheme of the Wealth Tax Act to suggest that a Hindu undivided family as an assessable unit must consist of at least two male members. The appeals were allowed with costs and the status was held to have been rightly determined by the Tribunal as that of a Hindu undivided family. THE ACT CONSTRUED IS THE WEALTH-TAX ACT, 1957.
• Gowli Buddanna v CIT Supreme CourtHelps department
  My father died and I am now the only male member of our family, with my mother and unmarried sisters. Must the family income be assessed on me as an individual?
  No. The Supreme Court held that the income continued to be assessable in the status of a Hindu undivided family. What section 3 of the 1922 Act makes an assessable entity is a Hindu undivided family, not a coparcenary, and a joint family may consist of a single male member together with widows and other female members of deceased coparceners. Property of a joint family does not cease to belong to the family merely because it is represented for the time being by a single coparcener. The property here had belonged to the family in the father's lifetime and continued to do so.
• CIT v Nandlal Gandalal Supreme CourtHelps taxpayer
  Our family business is run entirely outside India, but two coparceners are partners in Indian firms with family money. Does that make the family resident in India?
  No, on these facts. The Supreme Court held by a majority that a family is resident unless the control and management of its affairs is situated wholly outside the taxable territories, and that affairs there means affairs capable of being controlled and managed by the family as such. A partnership entered into by a coparcener with strangers is a contract between him and them, not between the family and them; neither partnership law nor Hindu law gives the family any controlling power over it. So the firms could not be affairs of the family and did not make it resident, even though the income from them belonged to the family. Hidayatullah J dissented.
• CIT v Smt Indira Balkrishna Supreme CourtHelps taxpayer
  Several of us inherited property jointly and receive the dividends and interest together. Can the department assess us as an association of persons?
  No, not on mere joint receipt. The Supreme Court held that an association of persons under section 3 of the 1922 Act means two or more persons who join in a common purpose or common action, and because the words appear in a charging section, the object of the association must be to produce income, profits or gains. It must be a combination formed for the promotion of a joint enterprise. Three co-widows who inherited an estate as joint tenants, did not divide it, and simply received dividends and interest jointly were held not to be an association: they had done no act which helped to produce the income.
• Charandas Haridas v. CIT — where an asset admits of no other mode of division, dividing the income divided the asset; and why s.171 would decide the same facts differently today Supreme CourtHelps taxpayerSuperseded by amendment
  The family's only income-producing right is the karta's share in a managing agency, which cannot be split among the members. They divided the commission between themselves. Is that a partition the department must accept?
  In 1960 the Supreme Court said yes, on facts where no other mode of division existed. The Court held that there is nothing in the Indian Income-tax law or the law of Partnership which prevents the members of a Hindu joint family from dividing any asset; that Hindu law does not require the property to be partitioned by metes and bounds in every case if separate enjoyment can otherwise be secured according to the members' shares; that for an asset of this kind there was no other mode of partition open to the parties and the law does not contemplate that a person should do the impossible; and that on a genuine document, not a sham, which effectively divided the income and in the circumstances the assets, there was factually no Hindu undivided family in respect of those assets. The appeal was allowed with costs. READ THE ENTRY'S VALIDITY NOTE BEFORE ACTING ON IT: the assessment years were 1947-48 and 1948-49 under the Indian Income-tax Act, 1922, and the arrangement was a PARTIAL partition.
• CIT v Kalu Babu Lal Chand Supreme CourtHelps department
  Our karta is managing director of a company floated with family money. Is his remuneration his own income or the family's?
  The family's, on these facts. The Supreme Court held that as against the company the managing director is the individual appointed, and the company has nothing to do with his family. But as between him and his family the question is whether the remuneration was earned with the help of joint family assets. Here the family funds acquired the business, floated the company and financed it at every stage, the karta put in nothing of his own, and the articles named him as first managing director. Acquisition, floatation and appointment were inseparably linked, so the whole of Rs 61,282 was assessable in the family's hands.
• CIT (International Taxation)-3 v Bank of Tokyo-Mitsubishi UFJ Ltd High CourtHelps taxpayerNo later treatment found
  Our Indian branch earned interest on balances kept with the head office and overseas branches. Is that taxable in India?
  No, on the years before the 2015 amendment. A branch is not a separate legal personality, and one cannot make a profit out of oneself, so interest received by the Indian permanent establishment from its own head office or overseas branches is not chargeable to tax in India. The Explanation to s.9(1)(v), which deems a banking permanent establishment to be a separate and independent person, took effect only from 1 April 2016 and had no application.
• Linde AG, Linde Engineering Division v DDIT High CourtHelps taxpayer
  Two foreign companies bid jointly for a turnkey contract and signed one contract with the customer. The department says they are an AOP. Are they?
  Not merely because they presented a common face to the customer. An association of persons requires a common enterprise managed through some degree of joint participation; mere co-operation in serving one's own business objective is not enough, even where the business interests are common. Where the members' scopes of work are separate, each manages its own deliverables, and neither costs nor risks are shared, there is no AOP.
• CIT v Jagdish Medical Agencies High CourtHelps taxpayerNo later treatment found
  My firm pays interest on a deposit standing in the name of an AOP, and one of my partners is a member of that AOP. Is the interest disallowed as interest to a partner?
  No. An association of persons is a separate person under s.2(31)(v) and a separate assessable entity, different from the firm, so interest paid by a firm to an AOP is not interest paid to a partner and is outside s.40(b). The Allahabad High Court applied the Supreme Court's reasoning in Brij Mohan Das Laxman Das, which held that interest paid to a partner who represents his Hindu undivided family, on the deposit of his own individual funds, does not fall within s.40(b).
• Manian Transports v S. Krishna Moorthy, Income-Tax Officer High CourtCuts both ways
  I filed revised returns voluntarily after the officer raised a query, they were accepted, and the reassessments were completed on that basis. Does that end the s.277 prosecution for the original returns?
  Not at the quashing stage. The Madras High Court held that the argument that the revised returns were filed after a discussion with the Income-tax Officer and were accepted, so no prosecution would arise, 'has to be necessarily negatived at this stage, for it will relate to the realm of appreciation of evidence to be brought on record'. It also held that s.277 is independent and not interlinked with s.276C, so the s.277 prosecution of the person who made the verification survives even where the s.276C charge falls away.
• CIT v Marsons Beneficiary Trust High CourtHelps taxpayerSuperseded by amendment
  Our private trust has determinate beneficiaries and the deed lets the trustees carry on business. The Assessing Officer has assessed the whole business income as one unit in the status of AOP. Is that right?
  For years before assessment year 1985-86, no. Where the shares of the beneficiaries are known and determinate, s.164 has no application, the trustees must be assessed under s.161(1), each beneficiary's share is taxed as if it formed part of that beneficiary's income and the trustees' liability is the sum of those amounts — and this is so whatever the nature of the income, including business income. For assessment year 1985-86 onward this is displaced by s.161(1A), which charges the maximum marginal rate where the income consists of or includes profits and gains of business; the judgment expressly says at para 2 that it does not deal with that provision.
• Bhartiya Shiksha Prachar Samiti v Circle (Exemption), Jaipur ITATHelps taxpayerNo later treatment found
  Our society runs several schools, each under the threshold but well over it in total. Which years can we still claim s.10(23C)(iiiad) school by school?
  Up to AY 2021-22, each institution is looked at separately and each has its own limit — one crore rupees, prescribed by Rule 2BC. The Jaipur Bench so held for AYs 2012-13 and 2015-16 and, in the same order, recorded that the Finance Act 2021 changed the position with effect from AY 2022-23, so that from that year the total gross revenue of the person is what is tested against the five crore rupee ceiling.
• Air Force Navy Farm Owners Welfare Association v ITO ITATHelps departmentNo later treatment found
  Our association's members are fixed and known, so s.167B(1) cannot apply. Does that mean we get the basic exemption and slab rates?
  No. Section 167B(2)(i) is a separate limb: where the total income of any member, excluding his share from the association, exceeds the maximum amount which is not chargeable to tax in the case of that member under the Finance Act of the relevant year, tax is charged on the total income of the association at the maximum marginal rate. Determinate shares take you out of s.167B(1) but not out of s.167B(2), and the Tribunal held that the exclusion in s.167B(1) for a society registered under the Societies Registration Act 1860 does not carry into s.167B(2). That last point is not free from doubt: s.167B(2) opens 'Where, in the case of an association of persons or body of individuals as aforesaid', and 'as aforesaid' is capable of importing the sub-section (1) parenthesis. The assessee did not put the argument in that form and no authority was cited either way.
• ACIT v ITD ITD CEM JV ITATHelps taxpayerNo later treatment found
  Our joint venture AOP reimburses its corporate members for expenses they incurred on the project. Is that caught by s.40(ba)?
  Not where the payment is a pure reimbursement with no profit element. The Tribunal, adopting an earlier order of 30 July 2014 which it reproduced in full, accepted that s.40(ba) is very specific and calls for disallowance of payment of any kind by an AOP to its member, but held that the mischief the provision addresses is the enrichment of members through the back door, and that where the member is a company, distinct from its shareholders, and the payment is reimbursement of an expense with no profit element, no question of enrichment arises and s.40(ba) is not attracted. The Revenue's appeal was dismissed.
• Subodh Gupta (HUF) v Pr CIT ITATCuts both waysNo later treatment found
  My mother gifted shares to my HUF. Is she a 'relative' of the HUF?
  No. For a Hindu undivided family the Explanation makes only a member of that family a 'relative'. The karta's mother was not a member - the gift deed itself recited that the gift was to the family of her son - so 75,000 shares gifted by her were chargeable under s.56(2)(vii), and the list of relatives that applies to an individual does not travel across to a receipt in the family's hands. The decision has a second limb: the Principal Commissioner's valuation by reference to a later sale price was rejected, fair market value has to be computed under Rule 11UA, and the computation was restored to the Assessing Officer, so the amount was never determined. The appeal was partly allowed.
• Vinitkumar Raghavjibhai Bhalodia v ITO — a gift by an HUF to its member is a gift from 'relatives', and is in any event exempt under section 10(2) ITATHelps taxpayer
  My client received Rs 60 lakh from his own HUF. The Assessing Officer says an HUF is not a 'relative' in the Explanation, so it is taxable. What is the answer?
  There are two answers and the Rajkot Bench gave both. First, an HUF is not a body of individuals but 'a group of relatives' — every person who composes it falls within the Explanation's list — so a gift from the HUF to a member is a gift from relatives and is outside the charge. Second and independently, a sum received by a member out of the income of the family is exempt under section 10(2), which requires only that he is a member and that the sum came out of the income of the family.
• Seva Trust v ITO ITATHelps departmentNo later treatment found
  Our trust stopped running its distributorship itself and let another concern run it for a monthly fee. Does the income still 'consist of or include profits and gains of business' for s.161(1A)?
  On these facts, yes. The Tribunal held that the distributorship agreement was a commercial asset, that letting it out temporarily did not take the income out of the business head, and that the income was business income attracting s.161(1A), which was inserted with effect from 1 April 1985 and which the Tribunal found to contain no ambiguity whatsoever. The appeals were dismissed and the assessment in the status of association of persons was upheld.
• Statutory position — s.167B: when an association of persons or body of individuals is charged at the maximum marginal rate, and when only part of its income is CBDT Circulars & InstructionsCuts both ways
  Our association of persons has fixed member shares, but one member has other income well above the basic exemption limit. Can the Assessing Officer still charge the association at the maximum marginal rate?
  Yes. Section 167B(2)(i) is a separate and often-overlooked trigger: even where the members' shares are determinate, if the total income of ANY member for the previous year — excluding his share from the association or body — exceeds the maximum amount not chargeable to tax in the case of that member under the Finance Act of the relevant year, tax is charged on the total income of the association or body at the maximum marginal rate. Sub-section (1) is the more familiar trigger: where the individual shares of the members are indeterminate or unknown, tax is charged on the total income of the association or body at the maximum marginal rate, and its proviso pushes that up to a member's higher rate where any member is chargeable above the maximum marginal rate. Section 167B(2)(ii) deals with the split case where a member is chargeable at a rate higher than the maximum marginal rate: his relatable portion goes at the higher rate and the balance at the maximum marginal rate. Companies, co-operative societies and societies registered under the Societies Registration Act, 1860 or a corresponding State law are excluded from sub-section (1).

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.