ORDER
[DICTATED IN OPEN COURT]
Per Shri George Cheriyan [Senior vice-President] - This appeal relates to the assessment year 1981-82. We will narrate certain facts which are essential for rendering a decision in this case. A notice under sec. 148 was issued issued by the income-tax officer in the status of an association of persons. In response thereto, a return was filed in the status of HUF but at the hearing it was stated that it was contended that the capital gains was not assessable in the hands of either the AOP or the HUF but what was sold was the separate share of each of the vendors. The assessee put forth the same contentions before the AAC but the AAC did not agree with assessee.
2. The assessee reiterates the claim before us. One Muthalagu Pillai had three sons, Kumaravelu Pillai, Karuppaiah Pillai and Erulappa pillai. There was a partition in 1937 by which time Muthalagu Pillai, Kumaravelu Pillai and Karuppaiah Pillai had died. Therefore, the partition was between the four sons of Kumaravelu Pillai i.e. Ondimuthu Pillai, Muthalugu pillai, i.e. Mahalingam and Chockalingam and the son of Karuppaiah Pillai, i.e. Muthalugu Pillai [Jr.] and the surviving son of Muthalugu Pillai, i.e. Erulappa Pillai, A plot of land of 6,930 S. ft. at 6,
Petchiamman Padithurai Road, Madurai, came to the share of the four sons of Kumaravelu Pillai. This land had been leased out. Subsequently, Ondimuthu Pillai died, Muthalagu Pillai, the brother of Ondimuthu Pillai also died. They left behind their widows Pandiammal and Laxmi Ammal respectively. Mahalingam, the third son had four major sons, Kumaravelu, Sukumar, Vijayakumar and Sampathkumar and the last brother Chockalingam was alone, his wife having predeceased him leaving no children. On 12-2-1981, a document of sale was executed of which the vendors were Pandi Ammal, Laxmi Ammal, Mahalingam and his four major sons and Chockalingam. The vendees were the lessees of the property K Bose, K. Vasantlal and K. Palanivel. The sale consideration was Rs. 70,000. The question that arises is whether the capital gains arising from this transaction is assessable in the status of an 'AOP' or not.
3. The learned counsel for the assessee submitted that following the decision of the Supreme Court in the case of CIT v. Indira Balkrishna , since the property had come to the vendors by devolution, they could not be assessed in the status of 'AOP'. He submitted that this was also the ratio of the decision of the Madras High Court in the case of N. P Saraswathi Ammal v. CIT . He further pleaded that the assessment as made required to be quashed since the notice was issued in the status of 'AOP'. His further submission was that the assessment could not be made even in the status of a Body of Individuals because the Madras High Court themselves pointed out the difference where the property came by devolution and such property constituted a business and where such property was a mere investment where there was no continuous activity.
4. The learned Departmental Representative, on the other hand, submitted that since all the persons had joined together in executing the sale deed, there was clearly a coming together voluntarily and there was an Association of Persons. He further stated that there was no difference whether the income arose by realising an investment or it arose out of transactions in the form of business. According to the learned Departmental Representative, the decision of the Supreme Court in the case of Sevantilal Maneklal Sheth v. CIT was clear authority for the proposition that profits or gains which arise from the sale of an asset springs from the asset and although the operation by which the profits arise is out of sale, it would be no different from the profits arising out of the asset employed by way of utilisation thereof or investment etc. In any view of the matter, the learned Departmental Representative submitted the assessment had to be made in the hands of a single entity.
5. We have considered the rival submissions. We have set out the background of the case. It is clear that as far as the vendors Pandiammal and Laxmi Ammal are concerned, the property came to them by inheritance on the demise of their respective husbands prior to the sale. Chockalingam received the property on partition in 1937. Mahalingam and his four adult sons also received the property on partition. The Madras High Court in the case of N P Saraswathi Ammal (Supra) has observed at page 25 referring to an 'Association of Persons' as under :
'Although the expressions were left undefined, courts used to associate this class of persons with certain attributes, chief amongst which was their being associated in a common endeavour for producing taxable income. This at once excluded from the category those who found themselves thrown together by the accident of their birth, by the accident of anothers death, by the accident of testamentary dispositions, and so on. This was the ruling which the Supreme Court rendered in the year 1960 in Indira Balkrishnas case . In rendering that decision, the Supreme Court were not laying down the principle for the first time. They were merely following three very early decision of High Courts on the subject. Thus, by the time Parliament came to rectify the IT Act, which was in 1961, the year after the Supreme Court decided Indira Balkrishnas case , the idea of an AOP had become too well settled to need further clarification.'
From the aforesaid observations, it is clear that the concept of 'Association of Persons' excluded from its category those who found themselves thrown together by accident of their birth or others death etc. As Pandiammal and Laxmi Ammal came to be the owners of their shares consequent to the demise of their respective husbands, it is clear that they could not constitute an 'AOP' together with Mahalingam and Chockalingam as far as the property in question we concerned. The assessment in the status of an 'AOP' cannot, therefore, be upheld.
6. The question that remains is whether there was a Body of Individuals. The Madras High Court in Saraswathi Ammals case (supra) pointed out the distinction between an Association of Persons and a Body of Individuals by referring to certain broad features but stated that it was for the Tribunal on given facts to arrive at a finding as to whether there was any Body of Individuals or not. In particular, their Lordships observed :
'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 common management; if may be a common holding out; or 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.'
However, an exception appears to have been carved out when proceeding further their Lordships pointed out as under :-
'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 testators 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.'
From the aforesaid observations, it would appear that where what is held is only investment in property, the matter would require to be looked into further. In the present case, the property had been leased out. The lease continued right from the inception when the property was received on partition. Therefore, the rental income was accruing and the coparceners who were parties to the partition and thereafter their successors only continued to receive the rental income. As pointed out by the learned Departmental Representative, the receipt of income from investment or realisation of income by the sale of a capital asset would all be income arising from the asset. The question that remains is whether the receipt of lease income and thereafter the sale jointly by the persons referred to would make them a Body of Individuals for the purposes of assessment to capital gains. Capital gains may be receipt from exploiting an investment by way of sale. However, the property in question which was vacant land though leased out has come to two of the vendors by devolution and to the others consequent to partition. The property had already been leased out. There was no fresh joining together for leasing out the property by the present vendors. They only continued to enjoy the income from the leased out property. The Madras High Court in the case of CIT v. Madras Stock Exchange Ltd. has observed at page 556 :
'A person who lets out a property and enjoy the income therefrom, is more passive than active. It is not, therefore, reasonable to call it an activity for profit.'
Where the vendors in the present case merely continued to receive the leased rent in respect of the property which had already been let out and subsequently sold the property, having regard to the observations of the Madras High Court it cannot be said that there was any activity of profit from which the surplus was received. This would not be a case where income did not come from a static source. It came from a static source as contra- distinct from a business source which involved a constant flow of transactions and, therefore, we are of the view that applying the test in N P Saraswathi Ammals case (supra), the transactions cannot be considered to have been entered into qua the vendors by a Body of Individuals but it is a case where each of the vendors who had a definite share in the profit had to join together to execute a common sale deed because each had an undivided share.
7. For the reasons stated, the above assessment in status of an AOP cannot be sustained. We are also not able to agree with the learned Departmental Representative that the status should be taken as that of Body of Individuals. This being so the assessment as made is cancelled.
8. In the view we have taken we do not express any opinion on the contention of the learned counsel for the assessee that because a notice was issued u/s 148 in the status of AOP we are not competent to change the status to that of a Body of Individuals. Since the assessment itself has been cancelled, we do not go into the contention relating to the cost of acquisition.
9. In the result, the appeal is allowed.